From 2002 to 2016, Texas has awarded more than $7 billion in tax credits to companies through an economic program known as Chapter 313. The program is intended to attract investors by providing abatements to offset some of the property taxes that companies pay to school districts.
The fundamental flaw with the program is that, although the credits were a determining factor for several companies that moved to the state, 85 to 95 percent of companies that received the credit would have relocated to Texas regardless of whether the program existed.
This means the state gave away tax dollars — which otherwise could have been used for public services — to companies that were going to move to Texas anyway.
This waste of taxpayer dollars resulted in part from the structure of the program. A company needs a school district’s support to obtain tax benefits that are ultimately paid for by the state.
Under Chapter 313, school districts can also legally request “supplemental payments” from a company before approving its application. These payments often amount to more than 40 percent of the tax benefits provided to a company.
The negotiation over supplemental payments provides a rare window into company-government bargaining, allowing researchers like me to evaluate this program’s effectiveness. Central to the Chapter 313 program is a requirement that the tax incentive be “a” determining factor in an applicant’s decision to invest in Texas.
For example, firms that could have located in other states or countries, such as Toyota or Samsung, negotiated substantially lower supplemental payments to school districts in exchange for the school districts’ approval to participate in the program, whereas companies that had few credible walk-away options, such as ones that want to expand existing facilities, paid substantially higher supplemental payments to school districts.
In most cases, companies that used this program were planning to move to Texas anyway, and this program simply transferred tax dollars from communities to companies. A large majority of the 313 projects provide no net benefits to Texas, because most of the companies would have invested anyway. And this is for a program that will exceed $1 billion per year in 2022.
The fact that the state is offering a tax benefit that is so large that companies are willing to give back 40 percent of these benefits raises some concerns.
First, isn’t this evidence that the incentive is at least 40 percent too big? Second, are there ethical concerns where school districts sign off on state-financed incentives literally in exchange for payments from firms that are outside of the school funding formula?
The state would be better off by being more selective in the use of these taxpayer benefits and reforming the structure of the program. For starters, turning school districts into economic developers who then received $57 million in extra payments in 2016 from these companies is an obvious recipe for making poor economic development decisions.
Sensible reforms of this program would also require changes to the benefits and a more targeted use of incentives. A focus on new investments (and not expansions) and nonenergy-related investments would dramatically reduce waste.
In addition, the supplemental payment system is both unethical and excessively costly. Allowing 10 percent of Texas school districts to receive millions in supplemental payments while they grant billions in tax incentives is clearly wrong.
The state should address this conflict of interest by eliminating these supplemental payments and empowering the Texas comptroller to provide additional oversight of the program.
The state has multiple economic development programs, but it is important to evaluate the evidence on each program in order to make reforms. When it comes to the 313 program, the vast majority of these tax dollars are wasted. It doesn’t have to be this way.
Nathan Jensen is a professor of government at The University of Texas at Austin.
To view more op-eds from Texas Perspectives, click here.
Like us on Facebook.