For more than 20 years, state revenue has been drained by a program of school property tax abatements known as “Chapter 313,” named after its section in the Tax Code. This colossal giveaway forces the rest of General Revenue services – higher education, health and human services, public safety – to make up for foregone local school taxes. The state budget filled the gaps in school taxes that were 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. Instead, if the property were taxed at its full value, local tax revenue would increase and there would be less of a need for state aid. As such, those limited resources could be redirected and increase state support for our schools.
During the regular session, the Legislature passed a replacement for the Chapter 313 program, which expired at the end of 2022. The new program (which may be known as HB 5 or Chapter 403 of the Government Code) retains the basic structure of Chapter 313. HB5 reduces property taxes for certain investments, but also differentiates itself in the type of projects that are eligible, the extent of the tax break, and the role of school districts.
Renewables Excluded; Types of Eligible Projects Expanded
Renewable energy projects, including wind and solar electric generation, accounted for two-thirds of Chapter 313 projects, though only one-third of its cost. The inclusion of these renewable energy projects in Chapter 313 contributed to Texas becoming a leader in wind power across the states.
HB 5 completely excludes all renewable projects from receiving favorable tax treatment. This was done by specifying eligibility as: “an electric generation facility that is considered to be dispatchable because the facility’s output can be controlled primarily by forces under human control”(sec 403.602(8)(A)(i)(b)). This odd language is intended to promote natural gas plants, despite their role in accelerating climate change, while also excluding wind and solar. Also excluded are electric energy storage facilities – batteries that may prove essential in making renewable-generated power available whenever it’s needed, as opposed to when the wind’s blowing or when the sun’s shining (sec 403.602(8)(B)(ii)).
HB 5 also grants special treatment to manufacturing, including semiconductor fabs, critical infrastructure (which isn’t defined in the bill), and the “development of natural resources” (sec 403.602(8)(A). Presumably the Comptroller will adopt rules defining these terms, which could dramatically expand the scope and cost of the program.
Little noticed is that HB 5 rewards both new construction and expansion of existing facilities, while Chapter 313 covered only new construction. Although not separately calculated in the fiscal note estimate, prior unsuccessful Chapter 313 bills that proposed including this expansion were estimated to vastly increase the potential cost of that program.
Tax Break Reduced
Under Chapter 313, projects were taxed at a certain, reduced appraised value for a ten-year period, based on the amount of taxable value in the school district, regardless of the actual market value of the project. This value ranged from $100 million in the largest districts to $10 million in the smallest. Since most expensive semiconductor fabs or liquified natural gas export terminals often require an investment of $10 billion or more, this could result in a greater than 99% reduction in taxable value.
Instead, HB 5 offers a tax break of only 50% of market value (in most cases); Projects in a “qualified opportunity zone,” a federal program designating certain low-income census tracts for special tax treatment, are to be taxed at 25% of market value. Although this change from Chapter 313 should reduce the cost to the state in forgone school property tax revenue, many large industrial properties take advantage of “equal and uniform” appeals to lower their appraised value far below actual market value, which could decrease the final taxable value of a HB 5 project far more than 50% below its true market value.
In addition, HB 5 unaccountably gives a full 100% abatement during the construction phase of an eligible project (sec 403.605(b)). Chapter 313 taxed projects during their construction at the full value of the unfinished project, followed by the ten-year abatement period. This change will – of course – increase the cost to the state.
School District Kickbacks Eliminated
Under Chapter 313, school districts had the final determination whether to accept an application that had been certified by the Comptroller. In return for signing an agreement, districts generally received “supplemental payments” from the company up to $100 per student, per year, for the ten years of the abatement, plus an additional three-year period. Needless to say, these kickbacks totally distorted the district’s decision-making process, making it very difficult for school districts, all of which are suffering from inadequate state support, to reject an application and its attached payments.
HB 5 eliminates these pernicious payments. Without the inducement of these kickbacks, school districts may be more attentive to community opposition to proposals and start to reject applications more frequently. HB 5 improves access to the decision making process for the public by mandating a 15-day notice before a school board hearing on an application, which includes the name of the applicant and the location and description of the project (sec 403.611(c)).
Another Attempt at a “But For” Test
The key flaw in both Chapter 313 and HB 5 is the likelihood that many projects receiving tax breaks would have based themselves in Texas for other reasons, like natural resources, geographic location in the center of the country with an extensive coastline, pipelines, transmission lines, and existing facilities. To avoid rewarding tax breaks unnecessarily, there should be a test that a project would not locate in Texas “but for” special tax treatment.
Chapter 313 required the Comptroller to find that the tax break was a “determining factor” in the site selection decision. Virtually every application passed this test, rendering it meaningless. HB 5 attempts to limit wasteful incentives by requiring the Comptroller to find that “the agreement is a compelling factor in a competitive site selection determination and that, in the absence of the agreement, the applicant would not make the proposed investment in this state. The degree to which the Comptroller enforces this provision is yet to be determined, although the fiscal note for HB 5 states “it is the opinion of this office that the adopted Senate floor amendment with ‘compelling factor’ site selection language would not result in a reduction in the number of applicants,” indicating that many projects may be approved by the Comptroller that would have chosen to locate in Texas, even without a tax break.
Improvement in Number of Jobs, Wages
Chapter 313 required that a minimum number of jobs paid 110% of the average manufacturing wage in that county or 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 pegs the required wage to the applicable industry sector, and applies it to all newly created company jobs, not just the required minimum number.
Chapter 313 required projects to create only 10 or 25 jobs, depending on the population or characteristics of the county. This requirement was frequently waived as exceeding the industry standard necessary to operate the facility. HB 5 increases the minimum job creation requirement to between 10 and 75 jobs, depending on county population and minimum investment.
Defects in Chapter 313 Carried Into HB 5
HB 5 repeats Chapter 313’s provision that the State Auditor review agreements annually (sec 403.615). These reviews have been undertaken with a narrow focus 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. The number of agreements subject to review was increased by HB 5 from three per year to 10% of agreements in effect each year, but the scope of review is essentially unchanged.
Chapter 313 required that, for the minimum number of jobs, the company paid at least 80% of the premium and other charges for a group health benefit plan, whereas HB 5 only requires the company to “offer and contribute to” a health plan.
It is only because Chapter 313 included an expiration date that it faced the intensive examination in 2021 that led to its demise. HB 5 will not face a similar review until 2033 – ten years after it takes 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.
Likely Cost of HB 5 Unknown
The fiscal note for the final version of HB 5 is skeletal, stating only, “the estimated cost to the Foundation School Program (FSP) are expected to be significant but cannot be determined at this time.” Cost estimates in fiscal notes for earlier versions were nearly as vacuous, estimating a cost in forgone school property tax revenue of only $336 million by 2033.
Compare this to the Comptroller’s February 2022 Tax Exemption & Tax Incidence report, which estimated that Chapter 313 abatements would cost the state more than $1 billion each year for the next six years. After publication, hundreds of new applications were approved as companies rushed to take advantage of the expiring tax breaks. The potential cost to the state if all currently approved projects go forward is an astounding $31 billion through 2049.
It is unlikely that HB 5 will result in less lost school tax revenue than Chapter 313, since new categories of projects will be eligible and expansions, as well as new investments, will receive tax breaks. Chapter 313 required the Comptroller to publish statewide data on the value of property, not on the tax rolls as a result of Chapter 313. HB 5 omits this requirement so that the public will have to total the hundreds of individual projects to determine how much tax revenue is lost (Sec 403.617). The Comptroller could, of course, voluntarily publish the statewide cost in the biennial report.