Texas’ most valuable tax incentives program will expire this year. Chapter 313, which reduces school district property taxes for capital-intensive facilities to attract economic development to the state, will sunset on Dec. 31, 2022. Once the program sunsets, businesses and developers who want to bring large projects to Texas will be unable to negotiate reductions in school district property taxes. But it’s not too late. If the developer finalizes a 313 agreement in 2022, the agreement is grandfathered into the program. That said, there is limited time remaining. The comptroller’s office recently announced that to guarantee finalization of a 313 agreement prior to the program’s sunset, applications should be submitted by April 2022.
Readers interested in a detailed summary of Chapter 313, with nuanced explanation of the program’s economics, should refer to our previous article on the subject. The key takeaways for purposes of this article are: School district property tax rates generally make up half the total property tax burden in Texas; Chapter 313 is the only program by which school district taxes can be abated to attract new facilities; and both the developer and school district enjoy immense benefits from a 313 agreement. As our previous article explains, school districts keep far more money under 313 agreements than they would from increased tax collections, which are generally turned over to the state for redistribution to other districts under Texas’ Robin Hood school finance system.
Nearly every state offers robust property tax breaks to attract capital-intensive manufacturing facilities. So post-sunset, Texas communities hoping to attract new investments and jobs will be forced to require the largest developers to pay $100 million or more in additional property taxes as compared with neighboring states. For example, consider a $1 billion manufacturing facility. Louisiana, under its ITEP incentives program, would likely abate 80% of all property taxes for 10 years—reducing the property tax burden for that facility to about $30 million over 10 years, depending on location. Even if every other non-school district local taxing jurisdiction in Texas offers maximum abatement for 10 years—a rare event—that same facility could face a Texas property tax burden of about $125 million.
While there is hope that the Texas Legislature will adopt a replacement program in the future, this is far from guaranteed and cannot happen until mid-2023 at the soonest, when the legislature next convenes. It’s also unclear whether a replacement program would offer as significant a tax reduction as is available under Chapter 313. Finally, Chapter 313 is currently a windfall for school districts, often including eight-figure benefits to the district—meaning districts almost always agree to support the incentive. If the replacement program fails to mirror these incentives, school districts may be less likely to participate. For these reasons, any developer considering a Texas site for a future project will be well served to procure a legacy 313 agreement before year-end. Even developers with uncertain projects on the horizon should consider whether to submit an application now as a placeholder to keep the Texas site competitive in case the project comes to fruition.
Developers planning to apply in 2022 should not wait to do so. The 313 agreement is not grandfathered unless all steps are completed in 2022, generally including initial conversations with the school district; formal school board action on the application; lengthy comptroller review and supplemental requests; negotiation of agreement economics with the school district; formal action to designate a reinvestment zone; and, finally, formal approval of the 313 agreement by the school board. In normal times, it’s not uncommon for this process to take six months or longer from initial engagement with the school district. But with the program sunsetting this year, the comptroller’s office is already facing a swarm of last-minute applications for future projects. Given their limited staff, the comptroller’s office is unlikely to have time to review every application it receives. Developers should submit their applications now and avoid the scrum. As highlighted above, the comptroller’s office recently provided informal guidance that it could guarantee timely review of applications only if submitted by April 2022.
Timing aside, there are also critical considerations for how best to complete the 313 application to protect against comptroller limitations on future amendments. A 313 agreement can be invalidated if the application is inaccurate. So even after finalizing the agreement, developers frequently must return to the district—after finalizing site selection, facility plans, and construction timing—to amend the application and agreement to ensure continued accuracy. This is particularly necessary and beneficial if there are changes to the project scope or timing from the developer’s original estimates in its initial application.
But amendments are about to become more difficult. The comptroller’s office has recently announced a policy that, post-sunset, it will reject any attempts to amend legacy applications if the amendment seeks to either delay the start of the 313 agreement or expand the size or scope of the project. This limitation on future amendments requires developers to be strategic about commitments made in the application. Developers should be particularly conservative on construction timing by, for example, choosing a later start date that assumes construction and supply-chain delays. And to the extent facility size is uncertain, developers should err on the side of predicting the maximum size and scope for their project when completing 313 applications.
Finally, it is critical that developers receive sophisticated advice when negotiating and structuring the economics of the agreement. Specific points of negotiation are described in more detail in the above-cited prior article, but the importance of sophisticated counsel is amplified when negotiating terms for an agreement that may not begin for many years and for which amendments will be limited.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
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