Texas Economic Development program to sunset December 31, 2022: PwC

In brief

The Texas Chapter 313 value limitation program is a powerful economic development tool that allows a school district to agree temporarily to reduce ad valorem taxes on an eligible project’s investment for a period of 10 years. Although the Texas House approved recent legislation to extend the program, the legislation failed in the Texas Senate. As a result, the program is set to expire on December 31, 2022.

The takeaway: The state continues to offer several other incentive programs, such as Chapter 380 and Chapter 381 property tax abatements, Enterprise Zone benefits, the governor’s “deal-closing” Texas Enterprise Fund grants, and other programs. However, the Chapter 313 program generally provides the largest overall benefit in incentive packages for capital-intensive projects. Taxpayers considering major projects in Texas should act soon in seeking time to secure the substantial benefits afforded by the Chapter 313 program.

In detail

Under Chapter 313 of the Texas Tax Code, certain eligible projects may apply to the school district for a temporary limit on the taxable value of new property that a proposed project intends to put in place. An appraised value limitation is an agreement in which a taxpayer agrees to build or install property and create jobs in exchange for a 10-year limitation on the taxable property value for purposes of the maintenance and operations (M&O) portion of the school district component of ad valorem tax. The minimum new capital investment required to qualify for a Chapter 313 value limitation varies based on the category ranking of the school district in which the proposed project will be located.

Category	Minimum Investment	Minimum Value Limitation
I	$100 million	$100 million
II	$80 million	$80 million
III	$60 million	$60 million
IV	$40 million	$40 million
V	$20 million	$20 million

School districts are ranked Category I to Category V based on the total amount of property subject to tax in the district as of the prior tax year, and the minimum qualifying investment ranges from $20 million to $100 million. The value limitation also varies based on the category ranking and is equal to the minimum investment based on the ranking. A Chapter 313 agreement is available only to projects making new investments in connection with:

manufacturing
research and development
clean coal projects
advanced clean energy projects
renewable energy electric generation
electric power generation using integrated gasification combined cycle technology
nuclear electric power generation
computer centers primarily used in connection with one of the above project types
Texas priority projects (defined as those in which the qualified investment exceeds $1 billion).

Qualified investment includes the construction of new buildings and most tangible personal property, such as machinery and equipment. An eligible project also must create at least 25 qualifying jobs (or 10 jobs if the project is to be located in a rural or economically disadvantaged school district) that pay in excess of 110% of the area’s average manufacturing wage and meet certain employee health coverage requirements.

Observation: The Ch. 313 program has been a critical tool for economic development in Texas since it was first introduced in 2001. Given that the school district M&O tax typically accounts for over half of the total Texas ad valorem taxes, which are roughly 60% higher than the United States average, the scheduled expiration of this incentive program could hamper Texas’ ability to attract world-class investment projects in the coming years.

Texas continues to lag behind other states with regard to capital-intensive projects as its property tax is more than 1.5 times the national average. Further, Texas property tax abatements generally are less than what other states offer as a result of restrictions on the ability to abate the M&O portion of school property taxes.