Tax climate and economic incentives are an integral piece of the overall site selection process; thus, monitoring state legislative sessions is important to determine the impact to existing tax policies and economic incentives, as well as newly created policy. While approximately a dozen states are still in legislative session, this blog summarizes some key measures passed throughout the country that may impact your economic incentive and site selection decisions.

 

TEXAS

The 86thTexas legislative session, a biennial legislature, ended on May 27,with the governor required to sign or veto bills by June 16. This was a very impactful legislative session for Texans due primarily to the passage of public education and property tax reform.

Property Tax Reform

Despite failed efforts to cap annual property tax increases to between 4% and 6% in the 2017 legislative session, Senate Bill 2, known as Texas Property Tax Reform and Transparency Act of 2019, was signed into law on June 12 and results in capping the amount many cities, counties and other tax districts can raise the property tax rate, without voter approval, to no more than 3.5% from the previous year. House Bill 3 limits the growth rate to 2.5% for school districts. Community colleges and hospital districts with rates of 2.5 cents per $100 valuation or less require voter approval to exceed 8% annual revenue growth. The effect of this new policy is estimated to result in lower tax rates of an average 8 cents per $100 valuation in 2020 and 13 cents in 2021. The bill also requires more online reporting and transparency of property tax rates, assessments and tax bills.

Additional observations are as follows:

  • The property tax revenue growth rate limitation does not apply to new construction.
  • The 3.5% growth rate limitation can be averaged over three years.
  • The limitation does not seem to apply to Municipal Utility Districts (MUDs), which some argue diminishes the ability of cities and counties to generate tax revenues for community services and engage in economic development, putting MUDs at a competitive advantage.
  • Attempts to raise state or local sales tax rates, perhaps to offset the impact of the property tax reform, failed.
  • Efforts to increase the homestead exemption in favor of higher taxes for businesses failed.

Ch 312 - Property Redevelopment and Tax Abatement Act

In addition to capping annual property tax growth, property tax abatements under Chapter 312, known as Property Redevelopment and Tax Abatement Act, set to expire on Sept. 1, were extended by House Bill 360 to Sept. 1, 2029. In comparison to other states, Texas has relatively high effective property tax rates; thus, extension of this highly leveraged discretionary economic development tool is important for Texas cities and counties to compete for future investment.

House Bill 3143 requires additional noticing requirements under the Property Redevelopment and Tax Abatement Act. Perhaps most notably is the requirement to give notice of a meeting at which the governing body of a municipality will consider the approval of a tax abatement agreement as least 30 days before the scheduled time of the meeting. The notice must contain the following:

  • the name of the property owner;
  • the name and location of the reinvestment zone in which the property subject to the agreement is located;
  • a general description of the nature of the improvements or repairs included in the agreement; and
  • the estimated cost of the improvements or repairs.

This provision is a significant change from what historically has been a seven-day notice requirement. This may delay the ability of a company to make decisions and real estate commitments; thus, securing economic incentives earlier in the site selection process is even more important. The requirement to include the name of the property owner in the notice may also affect the anonymity of a company or the ability to use project code names.

Ch 313 – Texas Economic Development Act

Finally, Chapter 313 of the Tax Code, which allows for an appraised value limitation of a school district’s maintenance and operations portion of tax millage, was unaffected despite repeated attempts in the last several sessions to eliminate or amend the incentive. Thus, this valuable benefit will remain in place for large scale renewable projects, manufacturing projects and data centers.

 

INDIANA

Data Center Incentives

Through the passage of House Bill 1405, Indiana aims to attract data centers by exempting data center equipment and electricity used at the facility from personal property taxes and the state’s 7% sales tax. As with most data center incentives throughout the United States, there are certain requirements which must be met to qualify for these tax benefits:

  • Invest a minimum of $25 million to $150 million in real and personal property over five years, depending on the population of the county.
  • The average wage of employees is at least 125% of the county average wage for the county in which the facility operates.
  • 75% of materials and labor used in the construction of the data center must be through local vendors.

The gross retail and use tax exemption is valid for 25 years and is increased to 50 years if the qualified investment meets or exceeds $750 million.

 

NEW JERSEY

New Jersey’s legislature is still in session, but economic incentive experts are watching closely as a new era of economic incentive programs are being proposed by the state’s governor. Gov. Phil Murphy remarked that from 2010 through 2018, New Jersey paid five times more than [its] peer states for every job created or retained yet attracted five times less capital investment per incentive dollar, confirming his prior comments about the need for economic incentive reform.

Grow NJ Assistance Program

New Jersey’s marque program, Grow NJ Assistance Program, is set to expire on June 30. The program is surrounded by negative publicity resulting in the New Jersey Economic Development Authority (NJEDA) tightening its already strict protocols and making it difficult for an incentive to be awarded. Although the official wording is that the application must be “submitted” by June 30, the NJEDA is actually not considering an application as submitted until they have thoroughly reviewed it and deemed it as “complete,” which practically means it is unlikely there are too many Grow NJ incentive applicants still in the queue to get board approval.

With Gov. Murphy declaring he will veto any extension of Grow NJ, what comes next? As recently as June 5, the governor announced his vision for new tax incentives, including:

  • NJ Forward
  • NJ Aspire
  • Brownfields Redevelopment Program
  • Historic Preservation Tax Credit Program
  • Innovation Evergreen Fund

Each of these programs would be capped for a total annual value of $400 million. The governor is most bullish about the Innovation Evergreen Fund, which is designed to attract venture capital investments into startups.

New Jersey Forward Program

The NJ Forward program is thought to be the replacement for Grow NJ. NJ Forward is a jobs-based program that is strikingly like Grow NJ in almost every way including the minimum investment per square foot, prevailing wage/affirmative action requirements, CEO certification, material factor and green building requirements, a base/bonus structure and the fact that it is still a saleable tax credit. We make the following observations about how the program is different from its predecessor:

  • NJ Forward has a $200 million annual cap unless additional credits are deemed necessary by Treasury vs Grow NJ which has no cap on total awards.
  • NJ Forward eligibility period is capped at five years vs Grow NJ capped at 10 years.
  • NJ Forward requires a commitment to stay in the state for twice the term of the eligibility period (i.e., 10 years) vs Grow NJ’s one and a half times the eligibility period (i.e., 15 years).
  • NJ Forward’s standard base credit of $2,400 per job vs. the Grow NJ base credit varies depending on project location.
  • NJ Forward’s credit bonuses are capped at $6,400 with no bonus if the new jobs do not pay at least $15 per hour vs Grow NJ’s varying credit bonus caps ranging from $6,000 to $15,000 per year.

Since this bill was just filed on June 5, it is unclear how long there will be a gap between programs, which may result in the state of New Jersey being less competitive.

For additional information about these legislative updates or proposals, please contact me at krendziperis@siteselectiongroup.com for any questions.

Let us know what you think!