Texas Senate passes new economic incentive program to lure businesses to the state

An oilfield in Pecos County in February. (Pu Ying Huang/The Texas Tribune, Pu Ying Huang/The Texas Tribune)

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The Texas Senate on Wednesday advanced a new economic incentives package to help lure large companies to the state, inching lawmakers closer to a deal that would replace an embattled abatement program that expired last year.

But senators, who passed the plan 27-4, cut in half the amount of the tax abatement proposed last month by the House and offered extra incentives for development in economically disadvantaged areas of the state.

They also did away with a major House provision that had garnered some of the most vigorous criticisms of the old Chapter 313 plan by striking direct payments by companies to the schools, which benefited only the schools that landed deals. District officials have argued that the payments were vital to their survival and supplemented state funding that fell short when it came to repairing buildings and raising teacher salaries.

The differences are likely to send the legislation, House Bill 5, to a joint-chamber conference committee to hammer out a compromise before a Saturday night deadline. The legislative session ends Monday.

The defunct program, which the new plan is designed to replace, was allowed to expire in December after 20 years of offering tens of billions of dollars in tax abatements. Participants were able to get a 10-year discount on their school property taxes. Critics complained it caused massive inequity in schools and amounted to a corporate welfare program that allowed rich companies to break their promises about job creation.

But even some naysayers have said the old abatement program was part of the reason Texas — a state already known for its light regulatory touch — has had more success landing corporations.

The challenge now is for the House and Senate to bridge a fairly large gulf on some details of the plan, including who to let in, how many jobs to require, what guardrails should be in place and, the biggest chasm, whether to pay the schools.

The plan that left the Senate floor Wednesday was crafted with the help of reticent Democrats and Republicans who had pushed for stronger accountability measures and guardrails to keep the program from being abused.

“Your concerns are very well founded,” said Senate Business and Commerce Chair Charles Schwertner, R-Georgetown, who likened the process of crafting the plan to threading a needle.“This bill addresses those concerns directly. … Texas should have a school tax-abatement incentive program, but it should be smaller and more [focused] and have proper oversight and have proper protections for the taxpayers.”

Both the House and Senate plans allow companies to avoid paying school property taxes for 10 years. The state would instead make up the difference by paying the schools what they would have received. The abatement would be offered to certain companies seeking to build or significantly expand in Texas. The types of companies that would be considered eligible vary slightly between proposals, but lean toward manufacturing, high-tech, innovation and energy companies.

Both plans exclude renewable energy sources, which the Republican bill authors say already get enough federal tax breaks. The Senate proposal also excludes battery power storage projects from being able to participate — an effort to close a loophole in the House version that some believed would allow renewable energy companies to take advantage of the program against the wishes of conservative state leaders.

The Senate bill includes a requirement that the companies are not allowed to participate if they have been identified by the state comptroller as being detrimental to Texas values and business because of their environmental, social and governance factors — strategies that conservatives criticize as part of a leftist “woke” agenda with climate-change-conscious policies that threaten the Texas oil and gas industry.

The House bill excludes companies with ESG policies as well, although with more broad language that has caused some in the business community to worry that it would ensnare too many eligible and beneficial companies.

While the House plan offers a 100% abatement on school property taxes, the Senate plan only offers a 50% abatement — although it bumps that up to 75% if the project is located in one of Texas’ rural or economically disadvantaged, federally designated “opportunity zones.”

The House plan, by House State Affairs Chair Todd Hunter, R-Corpus Christi, doesn’t offer extra incentive for development in those areas, an addition that had bipartisan support in the upper chamber.

The Senate plan requires the companies to create more jobs than the House plan in exchange for the abatement, and it does not allow contract positions to be part of that count.

Both plans require a participant’s project in Texas to offer health insurance to full-time employees. They also include requirements that the jobs created must be equal to the average pay for jobs in their county and in their industry or sector — a much higher amount than earlier Senate proposals that only tied them to county wages, which would include minimum wage workers.

The Senate version also offers what Schwertner said was more oversight than the House version does, including performance bonds that protect the district and state if the company underperforms or folds and defaults on the agreement. It also includes an advisory council composed of lawmakers and state leaders, with a reserved seat for a rural Texas lawmaker, and heavily involves the comptroller in deciding the deal.

The version also requires that a company’s application have a public hearing in the district to which it wants to locate, and the local public school board must approve the deal before it makes it to that advisory council.

And if it passes muster, the deal can still be canceled if the governor’s office determines it’s not living up to its end of the bargain, according to the Senate version.

State Sen. Nathan Johnson, D-Dallas, who helped shape the Senate version, expressed reservations about incentivizing businesses who were already apt to come to Texas. He also described a lack of accountability and equity in the previous program.

In response to his concerns, senators voted to require that applicants prove a tax abatement would be the determining factor when deciding to locate to Texas.

On Wednesday, Johnson called the new plan “a vastly different form of property tax abatement incentive than we had previously in Texas” and said the priority placed on areas that have traditionally been left behind the state’s bigger investment centers “is something that’s never been done in the history of Texas.”

State Sen. Judith Zaffirini, a Democrat whose Laredo district includes several distressed business areas federally classified as “opportunity zones,” which qualify for tax incentives, voted for the bill, but she said she “looks forward to further refining it in conference [negotiations].”

And state Sen. Sarah Eckhardt, D-Austin, said she was concerned about including oil and gas exploration in the list of companies that could be eligible for the abatement.

“Oil and gas will always be in Texas,” she said, adding that Texas has some of the most productive basins in North America and that she was thankful to them for the opportunities the companies have brought to Texas. “But this sounds like a reward, not an incentive.”

Schwertner stipulated that not all companies are automatically going to win an abatement just because they’re initially eligible but said the industry needs to be protected.

“The oil and gas industry in the state of Texas has been an economic miracle for Texas and for the people of Texas for generations, and [it] will continue to be there,” Schwertner said. “And I think it should be nurtured and defended and protected. Texas runs on agriculture, high tech, health care, cattle, corn and wheat — but also on oil and gas.”

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