The End Of This Economic Development Incentive Could Hurt Texas’ Pipeline Of Projects

An economic development incentive popular with energy firms in Texas is slated to expire at the end of 2022, prompting fears the state could start losing out on large-scale manufacturing projects.

Proponents of the program known as Chapter 313 say its tax breaks generate more investment and jobs in Texas. And though critics argue it comes at a high cost to taxpayers, benefits just a few and might be unnecessary, the approaching expiration of the program is causing considerable anxiety in the economic development community.

“We are already seeing corporate representatives of some of the largest projects express concern about the ability to move forward with their project based on the uncertainty of this incentive’s future,” Greater Houston Partnership Chief Economic Development Officer Susan Davenport told Bisnow.

The Texas Economic Development Act, also known as Chapter 313 for its position in the Texas Tax Code, was passed by the Texas legislature in 2001. The incentive is designed to attract new manufacturing and renewable energy projects to the state through a special property tax agreement with local school districts.

Chapter 313 was renewed multiple times over the past two decades, but that came to an end during the 2021 legislative session, when lawmakers failed to advance two separate bills. That failure was something of a surprise, as Chapter 313 has frequently been held up by proponents and economic development officials as a major tool for attracting large-scale projects to Texas.

The nonrenewal is making waves with both economic development officials and site selection experts, according to ESRP Executive Managing Director – Site Selection Susan Arledge.

“Many feel that Texas will be out of the running for major automotive, aerospace and high-tech manufacturing projects that won’t locate in Texas due to the high property taxes, the fourth-highest in the nation,” Arledge said.

Under a Chapter 313 agreement, businesses are offered a 10-year limitation on their appraised property value for a portion of the school district property tax. In exchange, the business agrees to build or install new property and create jobs in the school district.

The structure of the Chapter 313 program is particularly beneficial to large, capital-intensive projects, and the majority of participants tend to fall in the energy or petrochemical sectors.

Davenport said that right now, her organization is working on a portfolio of more than 100 different economic development projects. Last year, the partnership and its regional allies secured 21 projects and over $704M in capital expenditure for the region, including corporate relocations.

Not all projects that are pursued by the Greater Houston Partnership qualify for Chapter 313. But the ones that do, particularly in the manufacturing sector, have historically utilized the incentive tool, according to Davenport.

Arledge noted that because most other states offer property tax discounts, the end of Chapter 313 could put Texas at a competitive disadvantage. A high-tech company might consider other locations like the Raleigh-Durham area, Atlanta or Denver, while an aerospace company might consider Birmingham, Charleston or Seattle.

But financial incentives don’t always guarantee success in attracting new projects. Earlier this month, global biotechnology giant Amgen announced it chose Holly Springs, North Carolina, for the site of a manufacturing operation over Houston, despite an estimated $110M in incentives.

University of Texas at Austin professor of government Nathan Jensen said that opposition to Chapter 313 — which is estimated to cost $1B in lost tax revenue each year — has been growing for years. Media investigations have generated more public understanding and criticism, particularly as most school districts fail to benefit from the program, and projects that do move forward don’t always end up as beneficial as promised.

“It's a big, expensive program, even for a state that has big, expensive incentive programs. And it's a very narrow set of constituents that win from it,” Jensen said.

Chapter 313 has been very beneficial for some rural school districts. Under the Texas Education Agency’s district classification system, 230 of the state’s 509 active Chapter 313 agreements were in rural districts as of November 2020, according to the Texas Comptroller’s office.

School districts choose whether to approve Chapter 313 agreements with corporate entities and the lost property tax revenue is ultimately supplemented by the state. Limitation amounts are established by statute and vary by school district, ranging from $10M to $100M. 

School districts can also negotiate additional supplemental payments from companies, making it a lucrative arrangement for those fortunate enough to be in areas where businesses want to build their projects.

In November, a total of 294 Texas school districts had entered into Chapter 313 agreements, concentrated in rural areas of west Texas, the high plains within the Texas Panhandle and the Gulf Coast. The Texas Comptroller’s office found that 222 districts had a total of 509 agreements, and several had five or more active agreements.

While proponents of Chapter 313 have voiced fears about companies opting for other states when the program expires, critics are less concerned. Jensen contends that even without Chapter 313 as an incentive, at least 85% of firms would have opted to relocate or expand in Texas anyway.

That figure is based on Jensen’s analysis of 257 firms that relocated to Texas with support from the Chapter 313 program between 2002 and 2014. Jensen found that some companies admitted on their incentive applications that they were looking only at Texas for a location, while other companies didn’t even wait to qualify for the incentive to start building. 

Many companies qualifying for Chapter 313 include upstream oil and gas firms and petrochemical producers. Aside from renewable energy firms and other occasional manufacturing projects, the program is frequently awarding incentives to companies that have few credible walk-away options outside of Texas, according to Jensen. 

“These aren't mom-and-dad shops. Look at the list, look at the locations of these investments. Most school districts aren't benefiting,” Jensen said. 

Texas Public Policy Foundation Chief Economist Vance Ginn told Bisnow that for too long, taxpayers have been footing the bill for mostly large companies, including energy companies, through Chapter 313 property tax abatements.

“This is not a consistent use of taxpayer dollars that puts some businesses above others through political privilege, and we are glad to see there was a bipartisan effort to not extend it past December 2022 when it is scheduled to expire,” Ginn said.

Unless Texas Gov. Greg Abbott decides to make renewal of the program an item of a special session, Chapter 313 will expire on Dec. 31, 2022. But that doesn’t mean that the program won’t continue to benefit qualifying companies for the next decade. 

Firms are still able to apply for the program until its expiration next year, meaning that last-ditch efforts to qualify for Chapter 313 could see firms receive property tax abatements through 2032.

“If there is a kind of push, [and] a bunch of companies want to get in under the deadline, they can do it. And they get to keep their incentives,” Jensen said. 

However, it remains to be seen whether the program will receive a last-minute deluge of applications. Timelines for flexible projects may be accelerated, but the decision-making behind a large-scale relocation or expansion is complex. 

The bigger question is what kind of incentive program will eventually replace Chapter 313.

“The one key issue is, it was such a lucrative program, the special interests fought like crazy for it. It’s just free money, right?” Jensen said. “The push to replace it — maybe they won't have it in place immediately. But there'll be a real push to replace it with something.”