EnergyStatewide NewsTaxes & SpendingState Officials Look to Adapt as Economic Development Tax Break Enters its Final Year and Applications Flood In

Chapter 313 is a provision of the tax code that allows for school districts to give property tax breaks to companies that choose to build operations in their areas. After much deliberation, the Texas legislature declined to renew the provision that was set to expire after its second decade of operation. But agreements already established under the current program will continue after next year.

Last month, the State of Texas announced the largest economic development in its history with Samsung’s $17 billion microchip plant set to be built in Taylor. Among other incentives, Samsung received a Chapter 313 award reducing its property value to $80 million for 10 years. It amounts to a $2 billion first-year reduction and a $3 billion average abatement over the decade.

The Post-Session Bum Rush

Since July, 57 applications have been submitted to the Texas Comptroller of Public Accounts — totaling 123 so far this year as of December 1.

Eighty-three total applications were filed in 2020 with 100 filed in 2019.

Entities that receive the abatements, a reduction in taxable value of the property, must meet the minimum qualified job benchmark of 25 in urban and suburban areas and 10 in rural areas. But the school districts can waive the job requirement, which happens about 90 percent of the time according to the comptroller’s office.

Of the 57 applications since July that promise to create a total of 339 jobs, 42 do not meet the minimum job benchmark. Collectively, the first-year reduction in taxable property value eclipses $24 billion and the group averages $21.4 billion in abatements per year over the 10-year life of the agreements.

Functionally, the way the abatements work is that in exchange for the capital investment and jobs promise, the local taxing entity agrees to value the property at a fraction of its projected value. 

For example, the latest applicant, JERA Renewables, has proposed building a solar farm in Industrial ISD’s district capable of generating 200 megawatts of electricity.

JERA, which promises to create one qualified job, will have its taxable property value reduced to $30 million during the agreement’s 10-year life. Its average annual reduction is $96.2 million.

In real dollar terms, based on Industrial ISD’s 2019 tax rate, that’s a $2.1 million difference in estimated tax collections during the first year of the project, which is 2024. But the actual tax difference will depend on the rate adopted year-to-year, which can change from projections.

Chapter 313 abatements have become incredibly popular for renewable energy companies that now make up about a quarter of the state’s power grid capacity. Of the 57 agreements registered since July, 43 are from renewable energy companies. But manufacturing facilities and other types of businesses can also be awarded these abatements.

The program is touted for its job creation, which varies greatly from project to project — the proverbial stick to the tax break’s carrot for the participating companies.

But a 2017 study found that between 85 and 95 percent of the businesses receiving Chapter 313 abatements would have built those operations in Texas anyway.

Very few of the agreements are denied by school districts, but it does occasionally happen. After pushback from the public back in June, the Troy ISD board rejected a $135 million abatement for Big Elm Solar that promised to create one job.

Comptroller’s Rule Change

Since 2009, the comptroller’s office has recorded all Chapter 313 agreements and compiled data in excess of the statutory requirements set by House Bill 3676 passed in 2009.

Last month, the comptroller unveiled a proposed rule change that would change the data collected on Chapter 313 agreements and the format on which it is publicly available.

“Amending the rules governing Chapter 313 reporting is part of a larger effort to manage a program that is closing to new applications while, still acknowledging that existing agreements will continue to be active for many years to come,” Comptroller Glenn Hegar told The Texan in a statement.

“The agency set out to create a more efficient reporting system that was less reliant on paper and pdf submissions and that could provide the public with more usable information.”

The current physical filing system that is cumbersome to record relies on projected tax rates, property values, and investments from the school districts. It also captures job creation and wage estimates biannually, along with other figures from the companies. 

For the school district information, the agency will compile the actual property value appraisals and tax rates as they are approved year to year.

This proposal sparked umbrage among certain circles that decried the proposal. 

Two of the state’s top think tanks — the conservative Texas Public Policy Foundation (TPPF) and the progressive Every Texan — both opposed Chapter 313 renewal during the 87th regular session and played a large role in torpedoing a proposed expansion of the program.

The pair joined forces again this month to criticize the comptroller’s proposal, calling on the agency to withdraw the proposal and maintain or improve the current method.

Jason Isaac, director of TPPF’s Life:Powered initiative, told The Texan that the same data should continue to be tracked going forward throughout the lives of the current agreements.

“Although the program is expiring soon, existing agreements will continue for up to 10 years, and Texans deserve to know the impact on their hard-earned tax dollars during that time. That requires an apples-to-apples comparison of 313 data over the years,” Isaac added.

The legislative intent written into Chapter 313 states that ISDs should only approve agreements that “enhance the local community; improve the local public education system; create high-paying jobs; and advance the economic development goals of this state.”

It tasks the comptroller with “strictly interpret[ing]” the program’s criteria and guidelines and issuing certificates for abatements that “create high-paying jobs; provide a net benefit to the state over the long term; and advance the economic development goals of this state.”

Part of this process is developing an economic impact evaluation, which informs the local officials on the project’s potential benefits or costs. But according to the comptroller’s office, their role in this process is largely ministerial. Applications can be rejected for paperwork errors, but it is ultimately a deal between the school districts and businesses.

The current database for these agreements and their accompanying filings is a collection of nearly unnavigable PDFs and Excel sheets riddled with bureaucratic jargon. For someone who knows what they’re looking for, head can be made of tails.

But for laymen, separating the useful information from the unusable is no easy task. Transparency in data only goes so far as the data itself can be understood.

For those steeped in the process and its nomenclature, this data can provide a reference point from which to compare individual proposals and evaluate the program itself.

But the data is flawed, often changing substantially over the course of the agreement’s lifetime.

Flawed Data

At the root of the rule change is the data itself. It’s crude, unreliable, and frequently proves inaccurate. But this is what’s available for those judging the program to operate from.

“[W]e have identified data that the agency has collected which is inaccurate and in some cases misleading,” Hegar added. “To suggest this data represents transparency in government is irresponsible, so my office has begun the process of identifying the data and information needed to provide actual transparency to lawmakers, stakeholders, and Texas taxpayers.”

Being a property tax-heavy state, much of the projections hinge on valuation estimates which can vary drastically from their actual values when push comes to shove.

For example, the agreement between Keechi Wind and Perrin-Whitt Consolidated Independent School District approved in 2013 estimated a $50 million starting valuation, on which it would pay full value before the abatement kicked it down to $20 million for the next eight years. But according to the agreement’s 2020 progress report, the actual valuation was posted at $13.4 million less than the projection.

In the original agreement, the Year 10 estimate, the 2023 tax year, pegged the property’s value at $29.2 million, but the updated projection is now $20.8 million — just above the abatement’s reduction.

This raises a typical problem with the Chapter 313 program: rapid depreciation occurs during the agreement’s final few years as the companies begin challenging their property valuations more to try and reduce the amount owed after the tax break ends.

And based on these projections, Keechi Wind’s property in Year 11 will be valued at about $7.5 million less than the original plan — and that’s without additional reductions that may come by the time the 2024 tax year comes around.

This Chapter 313 valuation conundrum runs opposite the broader trend of homestead property valuations. Each year, property valuations in Texas generally increase, often substantially. Therefore, unless the taxing entity adopts the “no-new-revenue” rate, then the derivative property tax bill will increase.

From 2019 to 2020, the comptroller’s office identified a $1.6 billion increase in local property valuations.

The other side of this is the tax rate, set by the local school district each year. These rates often change annually, and when they do not, the appraisal increase changes the amount of taxes collected. But the locality approves a given tax rate months before the new tax year begins.

While the entity can project its preferred tax rate 10 years down the road, that doesn’t mean it will prove accurate when that tenth year comes. Life throws curveballs at everyone, including local governments — and those entities are generally not lodestars of fiscal responsibility.

Take, for example, the last two years. The pandemic wreaked all kinds of havoc on fiscal projections.

First, it, with the help of state and local closure orders, spiked unemployment, hindering taxpayers’ ability to pay their property tax bills. Second, Texas became an even more sought-after destination for new permanently remote workers to relocate — driving up property values in many places across the state. And third, the state legislature’s 2019 tax reforms featured new property tax compression that increases state funding as the school district’s share decreases.

If nothing is finalized on the rule in six months, the proposal is automatically withdrawn and the process must start over. The three true outcomes are to implement the proposal as written, withdraw it entirely, or approve a modified version based on feedback received from stakeholders.

The third option is the likeliest outcome.

Ever since the legislature declined to renew Chapter 313, the push for a new but similar program accelerated.

Since Chapter 313’s inception, a whole cottage industry has cropped up that relies on the program. Peruse through the applications and many of the same firms will be seen whose job it is to help ISD’s and businesses through the application process. Then, on the back end, there are accounting firms who help these companies reduce their tax burden as much as possible.

The incentive for these consultants is there to be taken advantage of, but it is the state legislature that provided the opportunity and the school district’s alacrity from which Chapter 313 agreements are encouraged.

Barring another special session, the legislature will next meet in 2023. Then, it will be able to assuage or rebuff that push, along with passing any more stringent transparency requirements.