Not Open For Business: Death Of Chapter 313 Could Herald The End Of Texas’ Corporate Relo Reign

One of Texas’ most widely used incentive programs is set to expire at the end of this year, compromising the state’s ability to lure industries that have long propelled its economy.

Authorized by the state legislature in 2001, the Texas Economic Development Act, known colloquially as Chapter 313, was designed to attract new manufacturing and renewable energy projects through a temporary abatement of school district taxes. 

The program enjoyed overwhelming bipartisan support for nearly two decades, leaving many stakeholders shocked when, in an unexpected turn of events last year, the state Senate declined to consider a bill that would have extended the program.

Now on the eve of an election that could change the makeup of Congress and state and local offices, it joins a long list of measures that could upset the balance of the Texas Miracle.

“It surprised many, including some of the officials who did the vote,” said Maher Maso, former mayor of Frisco and a principal in the credits and incentives practice at Dallas-based Ryan. “They didn’t think it wouldn’t renew, but the building blocks kept growing.”

Opponents expressed grievances, ranging from allegations the program funnels money away from underfunded school districts to the idea it produces questionable returns.

But proponents argue that without the incentive, Texas’ inordinately high property tax burden will force companies to look elsewhere. This was the case in 1991, when Intel chose Arizona over Fort Worth for its chip fabrication plant — the event prompting the legislature to pass Chapter 313 in the first place.

“This was a program that allowed us to be more competitive, especially now, in today’s climate, where companies are looking to make the numbers work,” Maso said. “It takes Texas out of the mix.”

Texas has emerged as a leading destination for corporate relocations, but after a whirlwind two years, experts now worry the decision to sunset Chapter 313 will not only blunt the state’s competitive edge, but also jeopardize its long-held reputation as the most business-friendly state in the U.S.

Breaking Down The Incentive

Chapter 313 is aimed at several industries, including manufacturing, research and development, data centers, renewable electricity generation and more. Since its inception, the program has doled out nearly $1B in tax breaks, according to the Texas Tribune.

One of the more high-profile recipients is Tesla, which unveiled a $1.1B gigafactory outside of Austin earlier this year. Advocates of Chapter 313, including North Texas Commission President and CEO Chris Wallace, said deals like this underscore the benefit of the program.

“The value of that vacant piece of land before the plant was built in Central Texas was $5M. If you look at the taxable value today, it’s $80M,” he said. “The school district there gets tens of thousands of dollars of revenue each year — that’s teacher pay raises, that's more facilities, more programming for students.”

Manufacturing has for years been a mainstay of Texas’ economy. In 2019 alone, the sector employed roughly 909,000 residents and contributed $241B to the state’s gross domestic product, an output that supersedes the entire economy of Portugal, according to the comptroller’s office.

But in the midst of the pandemic, a surge in online sales and the onshoring of manufacturing pushed industrial development to new heights. The floodgates opened and companies looking for relatively low-cost, business-friendly environments put Texas at the top of the list.

In late 2021, both Samsung and Texas Instruments announced plans to bring multiple chip manufacturing facilities to the state. Those investments are expected to add up to $47B, according to the Texas Economic Development Corp.

At its $17B plant, Samsung pledged to create 80,000 jobs and invest $356B, primarily in chipmaking and biopharmaceuticals, according to the Austin Business Journal. In exchange, Taylor ISD agreed to a Chapter 313 incentive that will save the company $292M in property taxes over the next 10 years.

This break likely sealed the deal for Samsung, but Kim Moore, executive managing director on Newmark’s Global Strategy and Consulting Team, said other semiconductor companies will be less motivated to seek out Texas once the incentive is off the table. 

“One of the biggest fears, from an economic developer’s perspective, is that these big capital investment projects won’t consider Texas because they will have to pay— theoretically, if it doesn’t get renewed or replaced — the school district property tax, which is almost two-thirds of your tax bill, in most cases,” Moore said. “That’s a very big hit to a company’s bottom line.”

Bones Of Contention

Chapter 313’s language implies the state reimburses tax funds forfeited by school districts, but whether that actually occurs is a subject of debate. 

Democratic state Rep. Mary Gonzalez, whose House District 75 includes east El Paso County, said the program lacks financial transparency, which is why she wants to see a new version that benefits Texas while also ensuring recipients pay their fair share of taxes.

“Big picture, we have a lot of loopholes for corporations,” she said. “What I’m interested in is making sure that any new initiative that supports economic development and business development is transparent and does not negatively impact our public education system.”

Chapter 313 may mean school districts get less money on the front end, but the property tax revenue gained in the long term makes the incentive worthwhile, Moore said. 

“When you’re talking about a $17B capital investment, that's hundreds of millions of dollars in property taxes a year,” she said. “That’s more money than most school districts need to operate or to support their growth plans.”

Another area of debate is the inclusion of renewable energy as an eligible industry. Some lawmakers in favor of amending Chapter 313 argue the number of jobs produced by wind and solar projects are not enough to justify a multimillion-dollar tax break.

Of the 509 existing Chapter 313 agreements, 38% are made up of manufacturing projects while 61% are related to renewable energy, according to the state comptroller’s latest report. More than 80% of the 9,116 jobs created by those agreements are in manufacturing.

Despite this disparity, Wallace said rendering wind and solar ineligible could give ammunition to states trying to lure business away from Texas.

“The bottom line is that other states are competing with Texas,” he said. “Site selectors from other states are now saying to their clients, don’t go to Texas, they have an unreliable electrical grid, and they’re doing away with their incentive programs.”

Others suspect the concern around job creation may be a red herring, and that the removal of renewable energy is another way to rail against ESG and uphold the state’s support of oil and gas.

“Energy policy is a big point of contention considering what has happened with the electrical grid,” Gonzalez said. “There are certain members of the legislature that believe we shouldn’t continue to foster economic incentives for wind and solar and should focus on other areas of our energy portfolio.”

What The Future Holds

Several lawmakers, including Republican House Speaker Dade Phelan, have already committed to reinstating Chapter 313 in the next year's legislative session.

But while lawmakers hash out a new version, which Wallace said could take anywhere from nine to 12 months, Texas will likely miss out on corporate relocations or expansions by companies that would otherwise see the state as a top contender.

Perhaps the more significant issue, though, is what the removal says about Texas’ attitude toward business. 

“There’s a reputational hit,” Moore said. “Texas has a reputation of being very competitive in economic development … is the pendulum shifting? It opens up a much bigger conversation than just the incentive itself, even though the incentive sunsetting is a pretty big deal.”

The end of Chapter 313 doesn’t necessarily mean that the future of other incentives is on the line, Maso said. But it does diminish the state’s ability to compete, because site selection decisions are often no more than a numbers game. Without this exemption, he said, the math might not work.

“It’s like cutting off one of your hands,” he said. “Can we function and do things? Sure. But maybe not as well. It’s a big disadvantage to Texas.”