Texas lawmakers decide $10 billion in tax breaks is enough, at least for now

Can a state be too business-friendly?

Texas leaders brag about having no state income tax and light regulation, and they’re aggressive in doling out tax abatements, cash grants and other aid to lure companies and investment. Apparently, there’s a limit to the largesse, and it’s about $10 billion — at least for the moment.

Last month, the Texas Legislature failed to reauthorize a generous business incentives program known as Chapter 313, referring to its place in the state tax code. The program is set to expire in December 2022, but business groups, chambers of commerce and other supporters say they hope to resurrect it in 2023.

“It’s the death of the program as is,” said Chris Wallace, CEO of the North Texas Commission, which advocates for the regional economy. “But even some who voted it down said they want to see it come back, just in a different form.”

Created in 2001, Chapter 313 allows certain industries to avoid the biggest portion of school taxes for 10 years if they invest in big projects here. Appraisals are capped at a portion of their actual value, often reducing the school tax bill by half or more.

Over the past two decades, Chapter 313 tax breaks have been awarded to over 500 Texas projects, saving companies $10.8 billion in school taxes, according to the state comptroller’s 2021 report.

Those incentives helped attract $217 billion in private investment, including auto plants, semiconductor factories, chemical refineries, natural gas processors and scores of wind and solar energy projects.

Many states would consider that a good return on investment, over 20-to-1. But critics insist most Chapter 313 projects would have come here anyway.

“What made this program so valuable to special interests was that it was such a big boondoggle,” said Nathan Jensen, a government professor at the University of Texas at Austin. “They loved it so much because it was free money.”

About 61% of active projects are in renewable energy and 38% are in manufacturing, with a small number in research and development. But over 70% of total tax savings and investment were in manufacturing, led by chemicals, plastics and natural gas.

Chapter 313 projects are concentrated in rural areas of West Texas, the High Plains and the Gulf Coast. In the Dallas area, Texas Instruments Inc. has received Chapter 313 grants for chip-making plants, including the wafer fabrication plant under construction in Richardson.

Plano ISD agreed to reduce TI’s property taxes for 10 years, saving the company an estimated $100 million. The plant is expected to cost about $3.6 billion and create at least 488 jobs.

“From my personal experience, it was really important that we were able to use that tool to incentivize TI to invest in that wafer fab,” said Bill Sproull, CEO of the Richardson Chamber of Commerce.

TI went to lengths to show it had other options, including “significant and competitive incentives” from locations in Singapore and Utica, N.Y. Additional savings from the other locations would have ranged from $1.3 to $4.1 million a year, according to school board trustees.

The TI deal, Tesla’s gigafactory near Austin and Toyota’s truck plant in San Antonio are often cited as the best examples of the Chapter 313 program. Those projects clearly could have located elsewhere, and Texas’ high property taxes could have discouraged the giant investments.

But most Chapter 313 tax breaks aren’t needed, according to Jensen’s research. Companies don’t have to prove the tax break is essential to doing a deal; the tax savings must simply be “a determining factor.”

The state comptroller, which must approve Chapter 313 agreements, said that’s difficult to assess. “It’s plausible to assume that the availability of a large tax break is often a determining factor, if one of many,” the comptroller’s office wrote in a November report.

School districts are supposed to be unharmed by the awards, but the state revenue required to make up for Chapter 313 agreements “is substantial and is likely to exceed $1 billion in 2023 alone,” the comptroller said.

Companies also make supplemental payments to school districts to help win support for the tax breaks. Those payments, often amounting to more than 40% of the tax benefit, reveal a fundamental flaw: “Isn’t this evidence that the incentive is at least 40% too big?” Jensen wrote in a 2017 op-ed.

The payments also indicate which firms truly have other options because those companies negotiate substantially lower supplemental payments to the school districts, he said. Based on his research, Chapter 313 incentives were essential to landing just 10% to 15% of the approved projects in his sample.

At least 85% of the firms would have invested in Texas without the tax breaks, Jensen found. And the taxpayer cost per job topped $1 million by some calculations, in part because these are capital-intensive, not labor-intensive, projects.

In an investigative series last month, the Houston Chronicle documented many examples of Chapter 313 abuses. Among 35 natural gas processing plants that got $380 million in incentives, 10 had publicly announced the projects before applying for aid, the Chronicle reported. One company started site work months before applying and still got the subsidies.

There was a similar pattern with renewable energy producers, which are generally drawn to West Texas by strong winds and publicly financed power lines that carry electricity to Dallas and beyond.

Criticism of Chapter 313 has been building, and this year’s legislative session included a major House bill to reform the program and extend it for 10 years. But the bill would have expanded breaks for renovations, expansions and smaller projects, and it weakened job and wage requirements. A fiscal note by the Legislative Budget Board estimated that the program would cost schools over $6.2 billion in the last five years of the extension.

“They just went too far,” said Dick Lavine, senior fiscal analyst at Every Texan, formerly the Center for Public Policy Priorities. “People had to come face-to-face with just how out of control this thing had gotten — and the reins were being loosened even further.

“The fiscal note was outrageous, and that just blew the top off,” he said.

Every Texan, a left-leaning advocacy group, issued a joint statement with the conservative Texas Public Policy Foundation — the first time the two groups made such a public case, Lavine said.

“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,” the statement said. “Texans shouldn’t be on the hook for these sweetheart arrangements, and we certainly shouldn’t maintain them at the expense of our schools.”