Pending one more signature, companies seeking to make multimillion-dollar or multibillion-dollar investments in Texas will soon have a new way to access tax breaks.
In the closing hours of the 88th Texas Legislature, lawmakers voted May 28 to create a new corporate incentives program tied to public school funding.
In the days since then, reaction has poured in about the compromises reached in the legislative process and what the final bill means for economic development in Central Texas and across the state. Proponents argue it will keep Texas competitive when courting factories and other large projects that create jobs and tax revenue. Critics have maligned its use of school property taxes and what they see as corporate welfare.
The Chapter 403 incentives program, named for its place in state government code, would allow companies to lower their school property tax bills. It replaces the Chapter 313 program that came to an end in 2022 and had been used by companies such as Tesla Inc. and Samsung Electronics Co. Ltd. to set up large manufacturing plants in the Austin area.
The legislation creating Chapter 403 — the Texas Jobs, Energy, Technology and Innovation Act, aka the JETI Act or House Bill 5 — is widely expected to be signed by Gov. Greg Abbott, who early in the legislative session voiced support of the proposal.
If Abbott signs it, the law would take full effect on Jan. 1, 2024, with the state comptroller making documents available for prospective applicants starting this September.
How will Chapter 403 incentives work?
Legislative negotiations resulted in some late changes to HB 5. Here are some of the final takeaways:
• Just like with Chapter 313 incentives, Chapter 403 would give Texas school districts the ability to cap the taxable value of a property for up to 10 years, potentially saving companies millions or even billions of dollars over a decade as they pour investment into new facilities. The cap only applies to what is called the maintenance and operations (M&O) portion of school taxes, which goes toward daily operations of schools. The cap does not apply to the portion of the school tax rate that goes toward debt.
• Under Chapter 403, 50% of a property’s value can be capped, as opposed to 100% under Chapter 313. The cap can increase to 75% for projects in federally designated opportunity zones, creating additional incentives to invest in economically distressed areas. There are more than 600 of these zones located across the state.
• Participants in the program must adhere to job creation minimums based on the size of the project. Projects that invest at least $200 million in the first tax year of the incentive must create 75 jobs, those that invest at least $100 million must create at least 50 jobs, those that invest $50 million must create at least 35 jobs and those that invest $20 million must create at least 10 jobs.
• Chapter 403 gets rid of the supplemental payments that companies receiving the incentives paid directly to school districts, a point of controversy for critics of the incentives who noted that the missed school tax revenue impacted the entire state under Texas’ public education financing system.
• Companies that receive the incentives must create an apprenticeship programs with the partnering school district. Plus, all employees must also be offered health benefits, a departure from Chapter 313.
• Both applicants and the school districts must share reports with the comptroller as part of an effort to ensure that the requirements of the agreements are being met, including mandatory job requirements from the applicant.
• Unlike Chapter 313, Chapter 403 incentives cannot be used for renewable energy projects. Types of projects eligible for the incentives include electric power generation facilities, petrochemical manufacturing facilities, semiconductor manufacturing facilities, desalination facilities, natural gas terminals or storage facilities, gas processing plants, carbon capture facilities, pharmaceutical manufacturing facilities, automotive manufacturing families, aerospace manufacturing facilities and corporate headquarters.
Texas business leaders voice support of Chapter 403 incentives
Chapter 403 will not offer companies as much tax savings as Chapter 313 but business leaders seem confident it will continue to lure major investments to the state.
“I believe that this tool will still work very well,” said Glenn Hamer, CEO of the Texas Association of Business. His organization represents businesses across the stateand served as a key voice in a coalition of 260 organizations, including more than 100 chambers of commerce, that worked to support the new program through the session.
“They’re very pleased with how things turned out,” Hamer said. “It’s important to look at things in a broader scope. Economic development incentives tend to be the icing on the cake. You have to have a strong underlying tax and regulatory environment, you need a robust infrastructure system.”
Hamer said the approval of HB 5 complements other pieces of legislation — including the Texas Regulatory Consistency Act, the formation of Texas Space Commission and the Aerospace Research and Space Economy Consortium and the launch of a new state business court — that will promote economic growth for years to come and keep the state competitive.
“I don’t believe there’s a state in the country where you will get major pro-business, pro-job-creation legislation through with generally very strong bipartisan majorities,” Hamer said. “These policy victories are durable.”
The revised tax breaks were also praised by Tony Bennett, president and CEO of the Texas Association of Manufacturers, an organization that represents more than 600 companies in a variety of sizes and sectors.
“The legislation will help Texas bolster our state’s economic security by helping to reestablish our global manufacturing dominance, re-shore our supply chain and ensure electric grid reliability,” Bennett said in a May 30 email. “Even at the reduced value, the taxable value of the property will be higher than it was prior to the investment, creating a net gain under every circumstance.”
Bennett opined that past school tax incentives were not 100% tax cuts either, since companies still paid a portion of the M&O school taxes for 10 years, based on the value cap of $10 million to $100 million approved by the partnering school district.
The Texas Association of Manufacturers CEO also said that companies that use Chapter 403 must still pay the interest portion of school taxes, as well as sales taxes, franchise taxes, inventory taxes and payroll taxes. And he noted that the legislation asks companies to demonstrate the incentive is a compelling factor in their decision to invest in the state.
“That is, without the incentive, these properties would remain undeveloped,” Bennett said. “The legislation includes provisions that protect the interests of the state and participating school districts. Projects must be clear ‘wins’ for Texas as the comptroller must find that the project will generate more tax dollars than the amount that will be discounted during the incentive period.”
Chapter 313 incentives were widely used by energy companies for new facilities along the Gulf Coast, and the loss of those incentives was decried by Todd Staples, president of the Texas Oil & Gas Association. He said earlier this year, as the legislation was progressing through the state Senate, that “Texas has lost out on major projects because we lack an economic development program.”
Mike Culbertson, interim CEO of the Corpus Christi Regional Economic Development Corp., called HB 5 “a unique opportunity to bring more manufacturing to the Lone Star State.”
“To help alleviate the economic woes caused by the supply chain crisis, geopolitical uncertainty, sky-high inflation and interest rates we need to take steps to incentivize the next wave of manufacturing, energy production, and the strategic production of everyday goods here in America,” Culbertson wrote in an opinion piece published by the Corpus Christi Caller-Times.
Not everyone loves new incentives
Nate Jensen, a University of Texas government professor who published a study in 2017 claiming that many of the corporate investments in the state would have come even without tax breaks, said the final version of Chapter 403 was “a real step backward.”
“The Texas Legislature had a real possibility to rethink this economic development strategy and learn from the failure of the previous program, Chapter 313,” he said. “It’s still a really strange structure that will lead to the overuse of incentives.”
He also criticized the extra tax savings for companies with projects in opportunity zones.
“This is a wild change given the whole opportunity zone program has been very controversial, mostly for doing a poor job of targeting actually struggling communities,” Jensen said. “Many gentrifying parts of Texas are in these opportunity zones, and now there are extra tax breaks for further investing in these areas.”
Central Texas Interfaith and the Texas Industrial Areas Foundation, also staunch opponents of these incentives, said HB5 “still fundamentally represents misguided economic development to the benefit of out of state corporations that would come here for other factors anyway.”
But they said the final version of the bill included compromises they supported to increase transparency.
“When these tax abatement deals are proposed at local school districts, there will now be a fair fight for taxpayers and public school supporters concerned about corporate welfare,” the groups said in a May 28 statement.
