This blog has been updated to reflect the House floor amendments adopted on May 4, 2023. Read the original blog here.
For more than twenty years state revenue has been drained by a program of school property tax abatements known as “Chapter 313,” after its section in the Tax Code. This colossal giveaway strains the rest of General Revenue services – higher education, health and human services, and public safety – to make up for foregone local school taxes. The state budget fills in gaps in school taxes created by these special interest deals by maintaining funding for a district’s state formula aid as if the abated value of the business property did not exist. If the property were instead taxed at its full value, local tax revenue would increase, reducing the need for state aid and allowing limited resources to be redirected to other uses or to increase state support for our schools.
In 2021, the Legislature refused to reauthorize the Chapter 313 tax breaks, but all agreements signed before its expiration at the end of 2022 will continue for the length of each contract, which may not start for years into the future and can run for 13 years or more. These costly and inefficient special treatments are expected to cost the state [RL1] $2.3 billion in the coming biennium, growing to $2.6 billion in 2026-27. The estimated total cost to the state of all active agreements is an astounding $31 billion! [RL2]
This session beneficiaries of these lucrative deals are pushing a replacement program – HB 5 by Rep. Todd Hunter. HB 5 has all the fundamental flaws of Chapter 313:
- It is largely unnecessary since most eligible projects are likely to locate in Texas for other reasons – natural resources, existing facilities and infrastructure, and geography.
- Even if an incentive were necessary for these companies to locate in Texas, the HB 5/Chapter 313 incentives are too expensive. The fact that companies “kick back” a portion of their incentive to school districts in return for the district signing the abatement agreement indicates that the tax break is larger than required to serve as an incentive.
- The decision by a school district whether to grant an abatement is distorted by these “kickback” payments. School boards have every reason to say “yes” and little reason to say “no.” Chapter 313 applications were rarely denied by school districts.
HB 5 was debated on the House floor on May 4. Ten amendments were adopted, but none altered these fundamental flaws in HB 5. At best, the amendments merely restored some aspects of Chapter 313 that were missing from the version of HB 5 that came to the floor. The bill passed May 5 on the third reading.
Renewable energy projects are still excluded from HB 5.
Wind and solar projects account for two-thirds of all Chapter 313 projects, although only one-quarter of the cost in forgone school property tax revenue. Instead, HB 5 would expand eligibility to “grid reliability projects,” [RL3] which are defined to exclude renewable energy (except if provided via battery) but includes natural gas terminals and processing plants, as well as projects to increase the capacity or extend the life of existing non-renewable electric generation facilities.
Rep. John Smithee offered a floor amendment to extend HB 5 tax breaks to include renewable energy projects as “grid reliability projects” but withdrew his amendment after the bill’s author, Rep. Todd Hunter, opposed the change, explaining that he had committed to excluding wind and solar from the bill “so that we can get various groups on board.” [RL4]
Essential job and investment requirements are waived [RL5] for these projects. Importantly, these projects would [RL6] not be subject to even the weak requirement that the agreement is “a determining factor” in locating the project in Texas, implicitly conceding that our exclusive power grid requires power generators to locate in the state regardless of special tax treatment.
Wage and benefit requirements are as weak as under Chapter 313.
Chapter 313 required that at least a minimum number of jobs paid 110% [RL7] of the average manufacturing wage in that county or in the multi-county Council of Governments area, which is often as little as half of the wage in the county where the project is located. HB 5 was amended by Rep. Martinez-Fisher to reinstate this weak wage requirement [RL8] but apply it to all newly created company jobs, not just the required minimum number. Construction jobs, for which a company could get credit toward the job creation target, would be pegged to the average wage of all jobs in the county. [RL9] As in Chapter 313, these wages would be calculated at the time of the application, then apply for the entire length of any agreement without adjustment for rising wage levels over time. HB 5 was also amended to reinstate Chapter 313’s requirement that companies offer a group health benefit plan [RL10] for the jobs required to qualify for the tax break, although without Chapter 313’s mandate that the employer pays at least 80% of the premiums or other charges.
HB 5 is likely to be even more expensive than Chapter 313.
- HB 5, while excluding renewable projects, would vastly expand the scope of the program. While Chapter 313 was limited to only new buildings, [RL11] HB 5 would give tax breaks for the expansion of existing buildings and fuel storage facilities or increases in the capacity of existing electric generation facilities.
The fiscal note for HB 5 summarizes the implications:
- The program proposed in this bill would allow projects and property not previously permitted in the Chapter 313 program, including desalination projects, natural gas terminals, and natural gas storage facilities. The program adds a 100% reduction of taxable value during the construction period while projects under the Chapter 313 program were fully taxed during construction. Further, under the proposed program, grid reliability projects are not subject to determining factor evaluations, job requirements, or minimum investment amounts in the program proposed by the bill which should attract projects that otherwise would not have been eligible under the prior program. Additionally, grid reliability projects that previously entered into agreements under the Chapter 313 program could be eligible for a new agreement under the proposed program since they are not required to demonstrate that the agreement is a determining factor in making the investment and locating the project in this state.
The fiscal note for a bill in 2021 [RL12] proposing a similar expansion of Chapter 313 has a further explanation:
- Most manufacturing projects regularly renovate or upgrade their facilities to maintain productivity and competitiveness. The petrochemical industry has a specific term for these periods of maintenance, retrofitting, and upgrading: “turn-arounds.” These can be expensive, with many projects investing amounts exceeding the required minimums of qualified investment. Turn-arounds for some types of petrochemical facilities can reportedly be as frequent as every three to five years.
Providing tax benefits through the Chapter 313 program would significantly increase the use of the program, allowing companies to have multiple agreements for the same project or facility, and potentially providing an ongoing tax benefit for companies that undergo regular renovations or refurbishments.
Like Chapter 313, HB 5 lacks a “but for test” – that a project would not locate in Texas “but for” a tax break.
The Comptroller must certify only that the special tax treatment is merely one determining factor [RL13] among many. Few, if any, proposed projects failed this test [RL14] under Chapter 313. An additional requirement [RL15] is that, over the 25 years after a project’s tax break expires, state and local tax revenue, including the alleged effect of the project on the state economy, is greater than the forgone school tax revenue over the ten years of the agreement, is similarly insubstantial.
Like Chapter 313, HB 5 lacks an independent audit of job creation and wage requirements.
HB 5 repeats the provision [RL16] that the State Auditor review three agreements annually. These reviews have been undertaken with a narrow focus [RL17] on the correct processing of applications, submission of reports, and disclosure of conflicts of interest. Whether the number of jobs created or the wages paid met statutory requirements is never examined, even though this information could be easily obtained from the Texas Workforce Commission.
HB 5 limits opportunities for public input.
Chapter 313 does not require a school district to consider an application, [RL18] then gives the district 150 days from the date of filing to make a final decision on the proposal, including the time necessary for the Comptroller to make a recommendation. The board must hold a public hearing before acting on an initial application or signing a proposed agreement. In contrast, HB 5 requires a district to forward an application [RL19] to the Comptroller, then gives the district only 35 days to act after receiving the Comptroller’s recommendation. [RL20] The public should have the benefit of at least a 30-day notice of the school board’s consideration of an abatement agreement to give the affected community time to become informed of the proposed agreement and respond adequately.
The next required review of HB 5 would not occur for ten years – too long for a new program.
It is only because Chapter 313 included an expiration date that it faced the intensive examination in 2021 that led to its demise. The version of HB 5 reported by the committee would not have faced a similar review until 2036. A floor amendment by Rep. Donna Howard moved the sunset date to 2033 [RL21] – ten years after it would take effect. In contrast, Chapter 313 was created in 2001 and faced sunset review due to expiration dates in 2007, 2011, 2014, and 2022. A better expiration of the new structure proposed by HB 5 would be 2029, tracking the six-year initial review period for Chapter 313.
[RL1]https://comptroller.texas.gov/transparency/reports/tax-exemptions-and-incidence/2023/96-463.pdf Table 11
[RL3]HB 5: sec. 403.602(12)
[RL5]HB 5: sec.403.604(a)
[RL6]HB 5: sec. 403.609(d)
[RL7]Tax Code, sec. 313.021(3)(E) and sec. 313.(5)(B)
[RL8]HB 5: sec. 403.612(b)(6)
[RL9]HB 5: sec. 403.604(d)(2)
[RL10]HB 5: 403.612(b)(7) compare to Tax Code, sec. 313.021(3)(D)
[RL11]Compare HB 5: sec.403.604(a) to Tax Code sec. 313.021(2)(A)(ii)
[RL12]HB 1556 (2021) https://capitol.texas.gov/tlodocs/87R/fiscalnotes/html/HB01556H.htm
[RL13]HB 5: sec. 403.609(c)(3)
[RL15]HB 5: sec. 403.609(c)(2)
[RL16]HB 5: sec. 403.616. Compare to Tax Code, sec. 313.010
[RL18]Tax Code, Sec 313.025(b)
[RL19]HB 5: sec. 403.606(e)
[RL20]HB 5: sec. 403.611
[RL21]HB 5: sec. 403.603