Texas can mitigate budget pain by ending corporate handouts

State lawmakers entered session on Tuesday facing a $1 billion revenue shortfall inflicted by the COVID-19 pandemic.

One place the legislature could look to begin balancing the budget is the Texas Economic Development Act, better known as Texas Tax Code Chapter 313. 

Chapter 313 is a state program offered to businesses that allow them to strike a deal with school districts to pay less in property taxes in order to incentivize those businesses to come to Texas.

Corporations form 10-year agreements with school districts to devalue the property they plan to move to. The lost revenue from the devalued property is then paid out of pocket by the state. 

One of the latest winners behind the program is Tesla, who struck a deal last year to move to Austin. Their agreement with Del Valle Independent School District will see Tesla’s $1.1 billion property valuation capped to $80 million — a 93 percent devaluation whose cost will fall on Texas taxpayers. 

Chapter 313 was created in 2001 after Boeing skipped out on moving its headquarters to Dallas and instead chose Chicago. 

Tax incentives did not appear to play a major role in Boeing’s decision to forgo Texas, a state already famous for having no income tax and cheap land to entice companies. Those familiar with negotiations and the pitching process said the reason was that the company thought downtown Dallas was dead and had no culture. Boeing’s former CEO later revealed in 2010 that it was actually because Dallas, Fort Worth, and Arington all competed with each other to try and lure Boeing, whereas the Chicago area presented a united front.

That factoid is important because as it turns out, tax incentives don’t play as much of a role in moving to Texas as these corporations would like lawmakers to believe. 

A study by government professor Nathan Jensen at The University of Texas at Austin examined more than 257 firms that moved to Texas between 2002-2014 and estimated that between 85 to 90 percent of these projects would have located to Texas anyway, without 313 incentives. 

A report released by the state comptroller in December estimates these school property tax exemptions will cost taxpayers $759 million in 2021 and balloon to $1 billion by 2023. 

Lawmakers must routinely renew Chapter 313 every several years to keep the program going. When last renewed in 2013, lawmakers set the expiration date for the end of 2022.

A bill last year sought to extend Chapter 313 until 2032, a move the Legislative Budget Board estimated would cost the state $9.6 billion throughout the program’s lifetime. 

“It’s a very expensive and largely unnecessary program,” Dick Lavine, a senior fiscal analyst with Every Texan who testified against the bill, told the Signal.

In his testimony to the House Committee on Ways & Means last year, Lavine argued that the language for Chapter 313 should stipulate that the tax incentive should not just be “a determining factor,” but the determining factor when a company is considering moving to Texas.

The state comptroller has a role in reviewing and vetoing Chapter 313 applications. 

“We essentially try to go through and to the best of our ability verify [313] is a determining factor,” a comptroller official testified to lawmakers in 2019. “A determining factor is very difficult to determine. A determining factor is not the determining factor.”

Lavine said the comptroller does not review whether a project will happen or not without the tax break. “They more or less use the standard of, will this project be more profitable for the company if they don’t have to pay property taxes?” Lavine said. 

For example, an oil and gas or chemical company that has no choice but to move to Texas can still benefit from Chapter 313. 

Further proof of that is the fact that companies regularly offer school districts “Payments In Lieu of Taxes,” or supplemental payments to school districts after a deal is struck. School districts typically aim to recover 40 percent of what they lost in property tax revenue through these supplemental payments, according to the Texas Taxpayers and Research Association.

These supplemental payments allow school districts to escape Texas’ Robin Hood law that seeks to make school funding more equitable across districts. 

More importantly, if companies are giving away a portion of cash that they are saving through the tax incentive program, it shows that the tax incentive program is too friendly to begin with.

Lavine said Texas would lose very little from getting rid of Chapter 313 altogether, but more realistically, lawmakers should tighten the review process to exclusively accept companies that are actually considering Texas because of its tax incentive program.

“If they do nothing, it goes away,” Lavine said. “But that’s not an immediate savings for the state because we still have these 10-year contracts that will play themselves out. But we’ll stop throwing good money after bad.”

Photo: Maurizio Pesce/Wikimedia Commons