Katy expands tax base, includes Cane Island

Katy City Council voted to annex three tracts of land totaling just over 400 acres on April 27. The land is part of the 1,100-acre Cane Island master-planned community that broke ground in 2014. As part of the annexation, Katy will provide police, fire, emergency medical and all other city services to homes built on the tracts.

Prior to the annexation, Cane Island was split between Katy and Houston jurisdictions. With annexation, Katy officials saw an opportunity to increase the size and tax base of the city.

“We had three different parcels that made up about 400 acres in the Rise Development [project], Cane Island, that were in Houston’s ETJ, and [Rise Development] wanted to be in the city of Katy,” Katy Mayor Fabol Hughes said.

In 2013, as Cane Island was still in the planning stages, Hughes said the city of Katy began a nearly two-year process of requesting the land be released from the city of Houston’s ETJ.

The limits of Katy’s growth

Houston’s ETJ map shows its jurisdiction extends from the Houston city limit, roughly the eastern edge of George Bush State Park, all the way to the Katy and Fulshear city limits. It encompasses areas such as Cinco Ranch and the Interstate 10 corridor.

“An ETJ is not in the city limits, but it’s still defined as being [part of] the city, except the ordinances and taxes don’t reach out into the ETJ,” state Rep. Cecil Bell, R-Magnolia said.

Bell has worked closely with Katy officials and residents of Waller County who want to be released from Houston’s ETJ.

Suzy Hartgrove, public affairs manager for the city of Houston Planning and Development Department, said requests for ETJ release are infrequent, but are approached with a spirit of cooperation. The department manages Houston annexation requests and ETJ release requests. She said a two-year wait is not uncommon for these requests. 

“We do a lot of coordinating with other counties [and municipalities] in the area to make sure [mobility and service] connections are being made. That’s why ETJs exist,” Hartgrove said. “[A city] has to ask us to release [ETJ property], and if it’s in our best interest, we do the release. It has to be approved by both city councils, and once we let it go the other city includes it in their ETJ, then they annex it.”

Hughes said the city of Katy has been aggressively annexing land since his election in 2013, mainly to increase the city’s tax base.

“I made up my mind, with all this growth coming … I told my city attorney we want to annex everything we can legally annex because if we don’t we’re going to get swallowed up. We need the commercial development. That’s what brings you sales tax revenue. That’s what increases your tax collections so you don’t have to depend on rooftop taxes,” Hughes said.

Taxation and representation

For the municipal utility districts located outside Katy city limits, the only way to access sales tax revenue is to partner with Houston in a limited purpose annexation. The city also creates strategic partnership agreements to solidify these partnerships, said Gwen Tillotson, Houston’s deputy director for economic development.

“[LPAs and SPAs] are beneficial to MUDs because [MUDs] are not in a municipality. [These agreements] give them a new stream of income that can be used to support things like infrastructure or to pay down debts that may, in turn, lower the tax load [for residents of the MUD],” she said.

Hartgrove said LPAs and SPAs are generally granted in small, mainly commercial, areas with only one or two landowners.

“We evaluate any annexation requests and create a service plan. The most difficult part [in residential annexations] would be the property owners all agreeing to the annexation. If any of the property owners fight it, it goes to binding arbitration,” Hartgrove said.

Once an LPA or SPA is formed, the city of Houston and the MUD split a percentage of sales tax generated, although specific agreements vary from MUD to MUD, Tillotson said.

“The city levies a one percent sales tax on the property that has been annexed for limited purposes, and the District and the City each receive half of the sales tax revenue generated,” said Katherine Carner, an attorney that represents  Harris County  MUD No. 81.

“HC MUD No. 81 deposits the sales tax revenue in its general operating fund and uses the revenue to pay for a portion of its operation and maintenance expenses, which allows the district to keep water and sewer service rates and operation and maintenance tax rates lower than they otherwise would be without the sales tax revenue,” Carner said.

MUD No. 81’s LPA received approximately $285,000 in sales tax revenue during 2014, Carner said. 

For Hughes this issue of sales tax revenue translates to a lack of equity in city services.

“Let me tell you the repercussions of [LPAs and SPAs]. They are serviced by West I-10 Fire Department [or a MUD-run emergency response team]. West I-10 takes their calls if they have a fire, and the city of Houston pays nothing,” Hughes said. “West I-10 is expending their manpower, materials, exposing their vehicles and getting nothing in return. City of Houston is raking all that money into their general fund, and it’s getting spent somewhere else. That’s not fair to the citizens and the cities that service them. So, we’re trying to work through the legislature to see what we can do about it.”

Land lock and legislative action

For the city of Katy, there is virtually no land left to annex. Since the annexations began at the start of his term, Hughes said the city has grown from approximately 10 square miles to roughly 17 square miles.

“We started on a path of annexation, and the only place we could go is west between Hwy. 90 and I-10. We had to take one mile at a time—we’re a home rule city, so that’s all we could do,” Hughes said. “We’re surrounded by the city of Houston on three sides, and Fulshear to the south.”

In working with Houston to release properties from its ETJ, Bell said the process can be lengthy and difficult, but there have been successes such as Cane Island.

“The operative word [when talking about annexation] is voluntary. Any time you talk about annexation it can get contentious, but if you don’t want it [as a property owner], then you don’t have to have it,” Bell said. 

Bell and other Katy-area state representatives proposed bills related to annexation in the 84th legislative session.

Bell authored House Bill 1418 to enable smaller, rural communities to partner with private businesses to install sewage, water and utility infrastructure beyond the limits of a community’s ETJ in order to lower residential tax bills, he said.

Current ETJ guidelines place limits on the distance cities can expand, based on the city’s population. The city of Katy, with roughly 16,000 residents, can expand one mile at a time, Hughes said. Houston, on the other hand, has an ETJ that reaches five miles beyond city limits.

HB 1418 passed the House and was referred to the Senate Intergovernmental Relations Committee on May 4.

Other bills related to annexation and ETJs did not fare as well this session. HB 2389, co-authored by state Rep. John Zerwas, R-Katy, and a companion bill, Senate Bill 1000, authored by state Sen. Lois Kolkhorst, R-Katy, would have changed the tax funding formulas related to LPAs, but neither made it past the committee stage.

“There’s a lot that goes into [annexation], such as deciding who can best provide water, sewer, police service and trash pick up,” Hartgrove said. “We would have to look at whether we’d be able to build a police station, a fire station, schedule trash pick up, and is it feasible to provide these services?”

The current mayoral administration in Houston has no plans to annex residential areas in the Katy-area Houston ETJ, Hartgrove said.

View a PDF breakdown of municipalities in Katy


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