Texas' multibillion-dollar corporate tax incentive program is slated to end in 2022. Will state officials let it die?

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Texas’ largest corporate tax incentive program is set to expire at the end of next year after lawmakers opted against renewing it for the first time in its 20-year history.

But the impending termination of the Chapter 313 program is expected to set off a rush of applicants as the state’s energy and manufacturing companies try to lock in massive property tax breaks before time runs out — a last-minute dash that will balloon the multibillion-dollar program for at least the next decade.

Already conversations are underway between state lawmakers, business groups and economic development leaders over what, if anything, should happen once the program ends, or whether there is appetite at the Legislature to revive some version of it.

Its supporters say the program, referred to as Chapter 313 after its section in the state’s tax code, has been instrumental in luring oil refineries, petrochemical factories and other job-creating and economy-boosting companies, such as Tesla and Samsung Electronics Co.

The incentive, which discounts local school property taxes for corporations, has been a key tool in drawing business to the state, economic development officials say — and, without it, they predict Texas will take a hit.

“If we don’t get our act together as a state and as economic development policy gets rethought, we could miss out on dozens of major projects,” said Tony Bennett, president and CEO of the Texas Association of Manufacturers.

Critics argue many of those businesses may have landed in Texas without the program, which they say lacks accountability and is burdensome to taxpayers in the state.

The more than 500 projects with active deals through June 2020 are estimated to receive $10.8 billion in local property tax breaks over the 10-year length of their agreements, according to the state comptroller’s office.

The next regular legislative session is scheduled for January 2023, which means Gov. Greg Abbott would have to call lawmakers back for another special session if he intended to revive Chapter 313 before it expires.

So far though, Abbott has kept mum on whether he plans to convene a fourth special session before then, and the governor’s office did not respond to a request for comment about whether he supports the program expiring at the end of 2022.

Abbott also could have asked state lawmakers to take up the issue during any of the three special sessions he called this year, but he did not do so.

State Rep. Stan Lambert, an Abilene Republican who asked Abbott in June to include the program’s renewal on the agenda for a special session that began in July, said earlier this week he’s not hopeful that state lawmakers will have a chance to renew or rework the program before it expires.

“The season has likely passed to try and address this in a special session,” he said. “I’m not too optimistic [the issue] would be included if we had three or four more special sessions.”

“Distorted incentive” 

Under the Chapter 313 program, manufacturing and energy companies apply to the local school district for a 10-year discount on their property tax bills in exchange for building or expanding in the community and, in a number of cases, creating new jobs. The Texas comptroller’s office must also approve those agreements.

There’s no downside for school districts to approve the tax breaks, because any foregone revenue for public schools is made up for by the state. That shift of state dollars, critics say, leaves less money on the table for other state services, such as health care or public safety.

Schools can also sign agreements directly with the companies for a supplemental payment in exchange for approving the tax break, which fosters inequity in funding among school districts.

“In essence, the school district was making the decision and the state was paying the cost,” said Dick Lavine, senior fiscal analyst for the left-leaning Every Texan. “It was a distorted incentive — one person makes the decision and another bears the cost.”

During the regular session that ended in May, Every Texan and the right-leaning Texas Public Policy Foundation teamed up to oppose legislation extending the program, saying the agreements “do not deliver the promised benefits, shift school funding costs, and waste tax dollars.”

“It’s time to call these tax breaks what they are: handouts to favored industries and to the few school districts that use them to incentivize companies to locate there,” read a joint statement from the two groups.

Around the same time, the Houston Chronicle published a multi-part investigation that found dozens of companies had failed to fulfill their job-creation pledges but faced no penalties and in some cases had already announced projects before applying to the program. The investigation also revealed that almost all applications for the program had been approved.

Just days before that investigation published, the House had passed legislation authored by state Rep. Morgan Meyer, a Dallas Republican chairing the chamber’s tax-writing committee, that would have extended the program for two years. But the bill was never debated before the full Senate.

The House had also debated a proposal by state Rep. Jim Murphy, R-Houston, that would have extended the program for 10 years and expanded the incentives to renovations or other improvements for existing projects. But the legislation came with a hefty price tag — almost $45 billion for the state through 2049, according to the Texas comptroller’s office — which only fueled Republicans’ and Democrats’ skepticism.

“Chairman, why would we need to further incentivize industries with 313 to do a renovation project if the idea of the program is to … attract that business and make them business partners?” state Rep. Trey Martinez Fischer, D-San Antonio, asked Murphy during the chamber’s debate on the legislation . “Why would we need to continue to incentivize?”

Murphy ultimately abandoned his effort and effectively killed the legislation.

Starting over

Already some groups such as the Greater Houston Partnership say they are dealing with consequences of the expiring program — and that “there is little doubt that the loss” of the program will hamper efforts to compete for future projects.

“We were recently working with a company that had been considering the area for a major manufacturing project but has since removed Texas from consideration, partially because of the uncertain future of Chapter 313,” Bob Harvey, the group’s president and CEO, said in an email for this story.

Lambert, the Republican House member from Abilene, said the incentives are especially important for the rural communities he represents in West Texas. For those towns, he said, such large-scale projects pump much-needed investments into the community, such as new hotels and restaurants.

“West of I-35, we provide most of the fuel, fiber and food that the other 85% of Texans enjoy every day,” he said. “You guys in the big cities need us. Don’t forget about us out here.”

But others are skeptical. Jason Isaac, director of the Texas Public Policy Foundation’s Life:Powered program, said Texas will not “see a slowdown in economic development” because of the state’s already business-friendly climate.

Before the program ends, as Texas Association of Business president and CEO Glenn Hamer put it, there will be “an extraordinary amount of activity” of applicants between now and the end of 2022.

And since there is no penalty to back out of the agreements, there is not much of a cost for companies that are contemplating future projects or expansions “to lock in some of these incentives,” according to Nathan Jensen, a government professor at the University of Texas at Austin who researches government economic development strategies.

“If you were considering a capital intensive investment in the future, this is a really lucrative incentive and there are few strings — it’s essentially free money,” Jensen said in an interview last week. “I don’t think we’ve seen fully the rush yet. It’s going to be coming.”

Last month, the comptroller’s office proposed reducing the amount of information it collects about Chapter 313 ahead of the program winding down, as the Houston Chronicle and Texas Observer recently reported. Critics of the program like Lavine and Jensen have called the proposed rule change a troubling lack of transparency.

Meanwhile, some advocates of the program are still hopeful that the Legislature could eventually consider bringing back some version of the tax incentive and are open to seeing changes to it.

“I think that most of the legislators that know economic development now realize that 313 has too much baggage,” said Bennett, the president of the Texas Association of Manufacturers. “Let’s put a sheet over it, bury it and start over. And we’re willing to do that. We want a program that’s competitive and without all of the onerous, exhausting characteristics that are in the current 313 program that do nothing but make us less competitive.”

Hamer said that part of the discussion in Texas will involve knowing what, if anything, happens in Washington, D.C., related to federal tax credits for renewable energy or similar technologies.

“You don’t want to over- or under- incentivize,” he said. “And what the federal government does will have an impact on how the 313 tool is imagined.”

In the meantime, Meyer, the House Republican who authored the failed two-year extension bill, said last month that he wants the tax-writing committee he oversees “to do a deep dive” into the program during the interim.

“We need some sort of 313 program,” Meyer said during a virtual conversation hosted by the Texas Taxpayers & Research Association. “We need to pass something like that next session to make sure the state of Texas remains competitive with other states in attracting businesses.”

Over in the Senate, where Meyer’s legislation during the regular session died, it’s less clear whether there is the same interest to rework the program. A spokesperson for Lt. Gov. Dan Patrick, who presides over the upper chamber, did not respond to a request for comment.

Still, Meyer apparently has backing from House Speaker Dade Phelan, R-Beaumont, who defended the program at that same event last month, saying that the state wouldn’t need to provide such incentives if other states or countries weren’t offering similarly robust abatements.

“Those who are opposed to them, they don’t understand what we’re up against,” said Phelan, who represents a state House district with dozens of active Chapter 313 agreements for petrochemical and refining companies. “So when we have nothing and [others] have a whole tool box, we’re at a decided disadvantage.”

Phelan said that while he thinks the program has “proven to be effective” in attracting industries and innovation, the Senate “didn’t seem like they had any appetite for extending 313, period.”

“And I don’t know if that’s changed or if it will change,” Phelan said.

Disclosure: Every Texan, Greater Houston Partnership, Texas Association of Business, Texas Public Policy Foundation and University of Texas at Austin have been financial supporters of The Texas Tribune, a nonprofit, nonpartisan news organization that is funded in part by donations from members, foundations and corporate sponsors. Financial supporters play no role in the Tribune's journalism. Find a complete list of them here.