Texas Legislative Update for Key Economic Incentive Programs
by Kelley Rendziperis, on Jun 25, 2021 9:54:58 AM
At the close of this legislative session, Texas allocated another $100 million to its deal-closing fund, the Texas Enterprise Fund. Meanwhile, the Texas Legislature chose not to extend the Chapter 313 Appraised Value Limitation program beyond 2022. As an economic incentive consultant, we field many questions as to how these developments affect the ability of Texas to continue to attract new business. This blog specifically addresses our practical experience with these programs and their impact on the site selection process.
Impacts of the Texas Enterprise Fund
The Texas Enterprise Fund has faced intense scrutiny over the years. There is no denying that it has been viewed negatively and even coined the governor’s slush fund in years past. However, the increased scrutiny and demand for transparency have effectuated major changes in the program. Based on our experience, companies are required to go through an arduous application and due diligence process to apply for this state cash grant. In addition, the holistic shift to performance-based payouts, demanding compliance measures and punitive clawbacks should quell most criticism of the program.
In addition, many critics do not realize the length of time it takes to apply and wait for a decision by the offices of the governor, lieutenant governor and speaker of the House. Since the premise of this program is that the grant is necessary to cover any cost gaps that exist between Texas and a competing location outside the state, a company is forced to whittle down its list of finalist sites to one single Texas jurisdiction before it can commence the Texas Enterprise Fund process.
Meanwhile, the company is not allowed to commit to the site in any way until a decision is made. Realistically this takes approximately three to four months. This may not seem like a long amount of time; however, this is an additional three to four months after a company has spent typically at least eight to 12 months or more undergoing the site selection process.
As one may imagine, just the requirement of only having one single Texas location in a state the size of Texas, can take weeks to decide. Moreover, this decision is usually made considering the possibility that they may procure this cash grant, but there is no guarantee.
Impacts of the Chapter 313: Appraised Value Limitation
The Appraised Value Limitation is a 10-year limitation on the taxable value of a significant project investment on the school district maintenance and operations tax. In other words, in Texas, many local communities can offer property tax abatements and/or rebates for city and county property tax millages, but not for the school district millage which is generally half of the overall property tax rate. The Appraised Value Limitation address the school district milage specifically and is not an abatement, but rather a limitation of value for 10 years. The limitation in each school district is generally set by the state comptroller based on the taxable value of industrial property in the district for the preceding tax year.
As an example, Carrollton-Farmers Branch, in the Dallas-Fort Worth metropolitan area, has a minimum limitation value and a qualified investment of $100 million. This means that a company must spend at least $100 million to qualify and the benefit would only be on the incremental investment spent over and above $100 million. The company would be paying full tax on the first $100 million of investment. Note that if the project were not to locate in the boundaries of the school district, they would not receive any incremental tax revenues. However, therein lies most of the criticism – would it locate there anyway?
The Appraised Value Limitation is set to expire at the end of next year and was not renewed this past biennium. Some opine that there will be a special session to address this matter, while others believe it will be readdressed in the next biennium. It is likely that the bills drafted to extend the program were overreaching, rather than simply extending the existing program in its current state and/or addressing some of the current criticisms of the program.
While there are similar issues with Chapter 313 to the Texas Enterprise Fund around timing of applications, etc., there appears to be more scrutiny over the fact that many of the awardees would have located in their chosen location regardless and thus, the Appraised Value Limitation was not a necessary factor in making the determination.
Frankly, this is a common assertion of opponents of economic incentives. Often, these benefits are considered early in the site selection process within operating cost models when companies are deciding where to locate.
Texas has a high property tax burden relative to most other states, ranking 36th in the Nation on the Tax Foundation’s 2021 State Business Tax Climate Index, and if these benefits were not integrated into an operating cost analysis earlier on, it is possible Texas locations would be eliminated from consideration due to overall cost. Every company weighs site selection criteria differently, but overall cost and the tax environment are key considerations.
Based on the proven ability of the state to address concerns with the Texas Enterprise Fund, there is no reason to simply eliminate the Appraised Value Limitation. Rather, improvements can be made while maintaining an effective and valuable incentive tool for Texas to compete for large-scale projects.
The state needs to maintain these programs which have clearly attracted many investments over the years. Other states that have eliminated their key economic incentive programs have found it challenging to compete for new business and most have reinstituted programs for these purposes.
Texas not only needs to maintain its economic development tools, but it needs to strive to be more nimble in utilizing its programs.
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