The rush is on in Texas for expiring economic development property tax breaks

The looming end of a lucrative economic incentive program in Texas has led to a stampede by companies seeking to lock in billions of dollars in local tax breaks that, in the case of semiconductor manufacturers, may be needed to snare new federal funding.

So far this year, more than 400 applications from energy and other businesses have been filed with the state comptroller’s office. If approved, the appraised property value for school district taxing purposes would be limited for 10 years for proposed new or expansion projects built that create jobs within the districts’ boundaries.

The Chapter 313 program, which expires at year end, is “mind bogglingly lucrative for companies,” according to Nathan Jensen, a professor in the University of Texas at Austin’s Department of Government. “There’s an incredible rush. It’s wild how many applications there are,” he said.

The number of applications is the most ever in a year, according to a comptroller’s office, which has approved relatively few so far.

 In 2014 there were 52 applications, while 2019 had 133. Critics of the program said this year’s avalanche of applications will greatly increase the cost to the state, which replaces most of the property tax revenue earmarked for maintenance and operations that school districts forgo. Schools account for the biggest share of property tax bills.

However, school bonds benefit if the projects are built, because property taxes supporting debt are not included in the limit.

School districts “get the extra tax base for bonded debt, which drives down the tax rate to pay off bonded debt,” according to Amanda Brownson, associate executive director of policy and research at the Texas Association of School Business Officials.

The latest biannual comptroller’s report on the program showed that from its inception in 2001 through 2019, companies realized an estimated tax savings of $2.5 billion. Factoring in the length of agreements, the savings was estimated to grow to nearly $10.8 billion.

Contributing to the uptick in applications is the CHIPS (Creating Helpful Incentives to Produce Semiconductors for America) Act passed by the U.S. Congress that provides about $52 billion in government subsidies for the U.S. semiconductor industry. The act aims to boost domestic production of computer chips needed for everyday items.

A July 29 notice by the U.S. Commerce Department’s National Institute of Standards and Technology (NIST) said awards to companies under the act will require state and local incentives for the project.

The inclusion of a matching requirement in earlier versions of the CHIPS bill led companies like NXP USA to note that need in its pitch for a tax break from the Austin Independent School District. 

The kind of local incentives companies will ultimately need under the CHIPS Act is unclear.

The NIST notice pointed to a preference for projects “that include state and local incentive packages that maximize local competitiveness, invest in the surrounding community, and prioritize broad economic gains, rather than just making outsize financial contributions to a single company.”

Greg LeRoy, executive director of Good Jobs First, which tracks economic development subsidies, said that statement would be “laudable if they’re saying they don’t want to favor places giving huge amounts of money to the company. “

In that case, the incentives companies are chasing in Texas might not qualify, he added.  

“What (Chapter 313) really does is just move money around between those parts of the state that don’t have a lot of industry to places in the state that do have a lot of industry,” LeRoy said.

In one of its two applications, NXP said it was requesting an appraised value limitation from the Austin school district starting in 2025 for an expansion of its existing semiconductor manufacturing facility in the city.

“NXP’s pursuit of economic development incentives is part of an overall strategy to leverage the bipartisan CHIPS for America Act,” the application said, adding that if it cannot secure Chapter 313 or other state and local incentives to lower its projected property tax liabilities, the company would allocate the project’s resources and funds to another site outside of Texas.

The estimated taxable value of the property for the district’s maintenance and operations levy would be limited to $100 million between 2025 and 2034, while the estimated value for property taxed to support school bonds would rise to a high of $601 million in 2026 from $174.2 million in 2024, according to the application.

The Austin district is awaiting an initial review by the state comptroller and will do a complete financial analysis once approved, according to Jason Stanford, its spokesman. 

“This would include developing an agreement that could include additional supplemental payments,” he said.

Typically, school districts negotiate for direct payments by the companies, capped at $100 per student, for each year the tax limit is in effect, making the tax break agreements lucrative for them as well.

Texas Gov. Greg Abbott says the federal CHIPS Act was a major factor in Samsung’s decision to potentially build 11 semiconductor facilities in the state.

Bloomberg News

Gov. Greg Abbott last month hailed Samsung’s decision to potentially build 11 semiconductor manufacturing facilities in the state, noting the CHIPS Act played a major role. 

“Close partnerships with companies like Samsung — who recognize the boundless possibilities Texas has to offer — are bringing greater opportunities to Texans, and this potential investment will bring billions of additional capital to continue growing our world-class business climate and diverse, highly skilled workforce,” Abbott said in a statement. “These new facilities solidify the Lone Star State as the nation’s leader in the semiconductor industry, and I thank Samsung for increasing their investment in the hardworking people of Central Texas.” 

Samsung Austin Semiconductor has 11 applications under Chapter 313 involving two school districts with tax limit start dates not until 2035 to 2043. The company pointed to a higher tax cost of operating in Texas and the appraised value limitation as a determining factor for locating projects there. 

“There’s no reason for these companies not to lock in a super-easy incentive,” Jensen said, adding the state’s replacement of school districts’ lost revenue was expected to reach $1 billion annually, although that was before the current spike in applications. 

The cost was among a number of problems documented by the Houston Chronicle last year.

The conservative Texas Public Policy Foundation and progressive Every Texan even joined forces to end Chapter 313, arguing the “tax breaks do not deliver the promised benefits, shift school funding costs, and waste tax dollars.”

“The carve-outs do have a real impact on our ability to adequately fund all public schools and ultimately shift the responsibility for supporting them onto other businesses, homeowners, and renters,” the groups said in a May 2021 joint statement, adding, “paltry” job requirements were often waived and most of the projects receiving the breaks would have located in Texas anyway.

Lawmakers last year decided to let the program expire at the end of 2022, but a Chapter 313 redo may be in the works when they return to session in January. 

Dick Lavine, senior fiscal analyst at Every Texan, said the legislature is likely to try to redesign or replace the program. 

“The role of the school districts might change, the role of the comptroller and oversight might change, job requirements, the percentage of the amount of abatement, all of those things I think are up in the air,” he said. 

Citing the consequences of American reliance on overseas manufacturing, Texas Association of Manufacturers President and CEO Tony Bennett said in a statement that his group will work with the legislature “to develop a new, modern and transparent economic development program that can help solve the supply chain and shortage crisis, create jobs and economic output, and ensure our state and nation is never again reliant on a foreign country, particular an adversary, for our most basic manufacturing needs.”

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