Costly tax breaks for companies not likely to end

A controversial Texas tax law criticized as a giveaway to large companies is set to expire after 2022, but state lawmakers appear poised to renew the program this legislative session.

Under Chapter 313, Texas taxpayers will pay the bill for tax breaks worth nearly $1.7 billion in 2021 and 2022 combined to corporations that relocate to, or expand in, the state — companies that, critics say, likely would have done so without the subsidy.

Others, however, say the program makes it cheaper to do business in Texas and creates jobs and tax revenue in counties across the state. Without the tax break, supporters of Chapter 313 say, companies could go to states that are more generous with public subsidies.

Two legislators — Sen. Beverly Powell, D-Fort Worth, and Rep. J.M. Lozano, R-Kingsville — prefiled bills to extend Chapter 313 through the end of 2032.

Neither legislator responded to requests for comment.

While it’s unclear whether the bills would pass as they are now, legislators and analysts anticipate Chapter 313 will almost certainly pass in some form and continue to play a key role in statewide economic development.

The Texas Legislature passed Chapter 313, known as the Texas Economic Development Act, in 2001. Lawmakers worried that Texas, with its high property taxes, wouldn’t be able to attract companies to the state.

The Chapter 313 provision allows school districts where a company agrees to invest to lower the taxable value of properties for 10 years. School boards usually grant the tax breaks for manufacturing facilities and renewable energy projects, which are expensive to develop.

In urban areas, the value of a property granted Chapter 313 tax breaks is limited to between $80 million and $100 million, regardless of the size of the investment. In rural areas, property values are held to $10 million in Chapter 313 deals.

Think of a homeowner who pays taxes only on the first $10,000 of his or her home’s value, even if the home is a mansion.

In exchange for the tax break, the firm promises to build the facility and create a set number of jobs that pay above-average wages, though companies can have their job-creation requirements waived.

Opponents of Chapter 313 say the program leaves major economic development decisions in the hands of school district administrators.

And when a company wants to invest in an area, the local school district has little reason to deny it the giveaway. Any money a school district would lose in tax revenue by offering a Chapter 313 is refunded from the state’s general fund.

Companies that receive tax breaks under Chapter 313 typically take the money they saved in taxes and pay the school district about 40 percent of that sum — so-called supplemental payments.

School districts face little risk by offering the tax break, thanks to the state refund. And the districts pocket the supplemental payments from applicant companies with few strings attached.

“It’s a program that costs schools millions of dollars per year. But the structure of the program is such that this cost is spread out across the whole state,” said Nathan Jensen, a government professor at the University of Texas at Austin and one of the most prominent critics of Chapter 313.

There are 509 active Chapter 313 agreements, and the number of applications for the tax break have grown in recent years, according to Texas Comptroller Glenn Hegar. In 2019, Hegar’s office received 133 new Chapter 313 applications, up from 68 applications two years earlier.

Hegar’s office is responsible for approving 313 deals. To win approval, the comptroller must determine that the project seeking incentives will generate, within 25 years, enough tax revenue to offset the tax break. The comptroller also must find the tax abatement is the “determining factor” in a company’s decision to invest in Texas.

“The Comptroller’s office is charged with approving Chapter 313 agreements, but in practice the requirements are hard to judge,” comptroller officials wrote in a November analysis of Chapter 313.

Determining how a project will perform over 25 years is “a job better suited for a fortune teller,” they wrote.

It’s also difficult to tell whether the tax break really is the dealmaker. “It’s generally impossible to determine the factors that ultimately cause a company to

make a final decision,” they said.

In the fall, the Del Valle Independent School District granted electric vehicle maker Tesla a tax break worth $46 million for its planned truck factory in Austin. Tesla said it will create 5,000 new jobs at the plant and invest more than $1 billion.

Toyota received a Chapter 313 tax break from Southwest ISD in 2004 for its South Side factory, which created roughly 3,000 jobs in San Antonio.

Supporters of Chapter 313 point to deals with companies such as Tesla or Toyota as evidence of the program’s success.

“The property taxes in Texas are about 60 percent higher than what they are in other states. And when you’re talking about a huge, capital-intensive facility, property taxes are going to be the single biggest tax they pay,” said Dale Craymer, president of the Texas Taxpayers and Research Association, which supports renewing Chapter 313.

“In Texas, the location, the regulatory environment — it’s a right-to-work state — those are all factors viewed as positives,” he said. “But companies easily get scared away if their tax bill is too high.”

In an era of polarized politics, Chapter 313 is unusual: It’s garnered fervent bipartisan support among lawmakers and industry groups. The Texas Oil and Gas Association recently called for the program to be renewed, and renewable energy groups also support its extension.

Oil- and gas-related facilities in the Permian Basin and along the Gulf Coast commonly receive the tax abatement, as do wind and solar farms throughout the state.

The conservative Texas Public Policy Foundation and the liberal think tank Every Texan both oppose Chapter 313’s renewal.

Both organizations point to research suggesting the tax breaks don’t make much difference. A study by Jensen, the UT professor, found that about 85 percent of companies still would have moved to Texas if they had been denied the 313 tax break.

Companies are frequently granted incentives for petrochemical manufacturing facilities in Southeast Texas. Yet they are unlikely to build a petrochemical plant elsewhere if denied the tax break, given the industry cluster and access to global shipping routes along the Gulf Coast, Jensen found.

And Texas has another advantage over other states for renewable energy projects: its many transmission lines that can ferry renewable electricity across the state.

“Many states lack the infrastructure to distribute electricity produced by growing numbers of (renewable energy) projects,” according to the comptroller’s report.

Letting the program expire would free revenue and ease the burden on the statewide school finance system, said Dick Lavine, a fiscal analyst at Every Texan.

Craymer of TTARA said despite its flaws, the program is a positive because even if the state subsidizes a company’s tax bill, the school district offering the tax break will still gain more revenue over time than if the project had never been developed.

And he said the 9,100 jobs the comptroller estimates that active Chapter 313 agreements have created is a lowball estimate that discounts other workers, such as contractors or employees at businesses that sprout up around new projects.

Still, Craymer said, his organization would like to see reforms before the program is extended.

Currently, a handful of districts across the state grant the majority of Chapter 313 tax breaks — and take home most of the supplemental payments from companies. Two Houston-area school districts, Barbers Hill and Brazosport, have approved about 10 percent of all active Chapter 313 agreements.

A model under which districts with the most Chapter 313 agreements share revenue with the rest of the state’s school districts “would not be inappropriate,” Craymer said.

Others have called for the program to strengthen job-creation and wage requirements for companies receiving the tax breaks.

Democratic Rep. Diego Bernal, whose district encompasses much of center-city San Antonio, is lukewarm on Chapter 313. Despite its flaws, he said, he understands how the program could look different to rural school districts that struggle to attract jobs and investment.

“My initial knee-jerk reaction is that I always want everyone to pay their fair share when it comes to funding education,” Bernal said. “But at the same time, a lot of districts like (Chapter 313 agreements). They like creating proximity, creating relationships, creating opportunities for internships, philanthropy. I’m not in a position to decide for them whether its a good idea or not.”

Bernal said he expects Chapter 313 to pass in its current form unless “someone has an idea that I haven’t heard.”

It’s not clear how much attention lawmakers will pay to Chapter 313 during this legislative session as they look to plug the budget shortfall caused by the COVID-19 pandemic and economic downturn.

But if lawmakers do seek to reform the tax break program, Bernal said he hopes it’s because of a shift in thinking on tax policy and education.

“In the end, I’m probably OK with (Chapter 313),” Bernal said. “But that doesn’t mean I still don’t have long-standing concerns about business tax policy and public education.

“If this gets revisited,” he said, “it’s hopefully because we’re having a larger conversation about public schools and taxation, generally.”

OCI Solar Power The 110-megawatt, Alamo 6 solar farm in Iraan in West Texas was completed in 2015 to provide renewable power to San Antonio. Its developers received a Chapter 313 tax limitation, which reduced its tax bill on the project by roughly $2 million annually.