Math Lesson: Chapter 313 Tax Abatement Agreements Don’t Add Up

Smithville ISD’s two elementary schools earned “D” ratings from the Texas Education Agency for 2018-2019 (the most recent year available). Its junior high got a “C.” Though its high school received a very low “B,” it earned no distinctions from the TEA.

Yet in March, the Smithville school board told its attorney to begin negotiations to turn down an estimated $10 million of tax revenue—in what amounts to a gift to a power company that boasts on its website that it “ranks among the top 10 onshore wind companies in the U.S.”

RWE Renewables America “owns more than 9 gigawatts of renewable energy capacity with another 2.6 GW under development. RWE thus ranks as the number 4 global renewables player and is number 2 in offshore wind capacity.” In its application, the company stated that it intended to request that the job requirement be waived.

So why should this massive international conglomerate get a handout from the tiny Smithville school district? Because it can. Local tax abatement agreements (under Chapter 313 of the Texas Tax Code) allow businesses such as big solar energy developers to seek tax abatement agreements with  school districts, with the implied (or explicit) threat that they can take their jobs and their future revenues elsewhere.

But does Chapter 313—titled the Texas Economic Development Act—really deliver economic development? Or do the taxpayers end up with the tab?

That issue has been studied extensively, and the conclusions are clear. At best, these incentives do not work; at worst, they can be harmful.

Research on the importance of such incentives on a business’s location choice has shown that many other factors come into play, and incentives are rarely at the top of the list. A 2018 study of the research literature on the effects of state and local incentives, with a focus on “but for” percentages—how many businesses would not have chosen a location “but for” the incentives offered—estimated that at least 75% of businesses that received incentives in the U.S. would have located where they did without them.

Here in Texas, a 2017 study of more than 80 Chapter 313 projects focused on the bargaining behavior between businesses applying for the abatements and the school districts granting them. Based notably on the percentage of a granted abatement businesses were willing to pay in supplemental payments to the school districts and on a survey of economic development experts, the author concluded that only about 15% of businesses that received such deals would have located elsewhere without them.

There are other problems with Chapter 313. Government intervention distorts the market. The recent blackout episode has allowed us to see the cold reality of what consequences subsidies can have. Renewable energy projects (which, granted, benefit from subsidies at all government levels) have displaced domestic energy producers.

And too often, school districts waive the job requirements when companies come back to them with lower estimates of the number of workers they’ll employ. It’s hard to understand how Chapter 313 could be described as an economic development tool that brings investments and jobs to Texas, yet allows school districts to simply waive the job requirement.

Our Life:Powered team has also found that a disproportionately high share—about a third—of 313 renewable energy projects were going to foreign companies, including some affiliated with foreign governments. To be clear, the problem is not with foreign companies investing in Texas but with market-distorting government favoritism negatively impacting Texas businesses and Texans in general.

What can Texas lawmakers do? The best thing would be to let Chapter 313 expire, as it’s set to do. If the problem is property taxes that are too high, then we should fix the problem, which exists for every Texan, not try to calm a symptom for select and usually big corporate taxpayers.

Yet if the Legislature renews Chapter 313, some improvements should be made, such as repealing the provision that allows job waivers.

In 2017, the Smithville school district sued the Texas Comptroller’s office over just $50,000 in lost revenues. Its superintendent at the time told the Austin American Statesman, “It’s not much, but that could make a big difference.”

The $10 million in revenues it’s about to give away to RWE Renewables America dwarfs that sum. And in a nutshell, that’s the problem with Chapter 313.