For more than a decade, Texas has attracted billions of dollars of manufacturing and construction investments.
Samsung, Tesla, Meta and Amazon have been highly publicized prizes, but they are alongside many other lesser-known manufacturers who together employ almost one million residents.
There has also been the relocation of hundreds of corporate head offices. In fact, Fortune magazine ranks Texas number one in terms of Fortune 500 companies, with 54 now calling the state home.
However, many worry that as inter-state competition increases through 2023 and beyond, Texas is losing a key tool in its kit: the Chapter 313 property tax break.
As legislated under the Texas Economic Development Act for the past 10 years, Chapter 313 allowed companies to negotiate 10-year property value limitations for new plant and facility investments on the maintenance and operations portion of their school district taxes. It has meant millions of dollars of annual savings for successful applicants, making or breaking investment decisions.
However, Chapter 313 expired on Dec. 31, leaving many applications and billions of dollars of investment in limbo.
Taxation levels are a major factor when making investment decisions. At the employee level, Texas has no personal income tax, making it an attractive destination for individuals considering relocation.
On the other hand, Texas corporate taxes are relatively high, ranking 47th out of 50 states.
As reported in The Texan, companies with revenues over $1.23 million can have profits taxed as high as 37.5 per cent. That’s on top of property taxes and state and optional local sales taxes. That’s why the valuation incentives under Chapter 313 were so critically important for corporations. In fact, applicants had to state that without Chapter 313 incentives, they would take their investment elsewhere.
Incentives continue to be popular with the voting public.
According to a survey published by the University of Texas at Austin, “Forty-six per cent of respondents said they thought state and local governments should ‘offer economic benefits, like reduced property taxes, to persuade businesses to move to Texas or expand their current operations.’ Thirty-one per cent disagreed.”
Opponents to Chapter 313 have complained about misuse of the program. They cited applications from limited liability corporations (LLCs) intending to simply sell their projects, with tax benefits attached, to a different company or investor in the future.For example, renewable energy company Hill Country Wind Power Rock Creek LLC applied for a Chapter 313 agreement with several central Texas school districts in May 2022. It didn’t plan to build the facility but instead, sell the project to an investor who would, justifying their application on the basis that it was taking the early risks and putting the project logistics together.
Nathan Jensen, writing in the University of Texas News, called the Chapter 313 incentive “an economic development incentive scam that is costing taxpayers billions a year.”
Instead of luring companies to Texas, Jensen’s research suggests “at least 85 per cent of these companies were coming anyway.”
Under Chapter 313, an application’s first blessing had to come from local school boards, with final approval from the Texas Comptroller’s Office. A flood of applications awaited confirmation as the program’s Dec. 31 expiry approached.
“My office had the difficult task of managing a workload that has more than tripled in the last six months of the year,” wrote Texas Comptroller Glenn Hegar in a media statement on Dec. 13. “The legislature could have provided express transition authority that would have allowed us to continue reviewing and approving applications after the first of the year so long as the applications were filed before the program’s expiration date. But the legislature did not provide such transition authority.”
Attorneys representing several applicants filed writs of mandamus with the Texas Supreme Court in a last-ditch attempt to force the comptroller’s office to approve all applications before the Dec. 31 deadline. Hegar termed this legal action “frivolous,” and in fact, the court ultimately ruled it did not have the authority to force the state to process any outstanding 313 applications.
The future of corporate tax incentives post-313 will be critical as the Texas legislature resumes sitting on Jan. 10.
“We absolutely need to get a tool back on the books that encourages economic development by enabling reductions in school property taxes in exchange for large, job-creating projects,” Glenn Hamer, president of the Texas Association of Business, told the Austin-American Statesman. “This session would be a failure if that doesn’t happen.”
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