by Kyle Hagerty

The Lone Star state is home to one of the most perverse corporate incentives in the country, allowing school districts across Texas to abate property taxes for corporations, sacrificing the largest source of funding for public schools at the altar of job creation. The law is known as Chapter 313. Created in 2001, the legislation has twisted economic development incentives for businesses, school districts, and taxpayers for nearly two decades. Originally set to expire in 2007, the controversial law, which has already paid out billions in corporate welfare, is set to be renewed again during the ongoing Texas Legislative session.

Why It Was Created

Texas prides itself on being a state of enterprise. A leader in job growth for decades, lawmakers were looking for a way to keep the magic going after the Dot Com bubble burst in the late 90s. Texas’ public policy defining factor is that the state does not levy income tax, instead relying on property taxes to fund the majority of state and municipal services. That’s great for wage earners but bad for homeowners and businesses paying higher property taxes than they would be in other states. Economists argue that Texas’ high local property taxes puts the state at a disadvantage when competing for business making new investments. This is especially the case with industrial properties, with taxes among the highest in the nation. By giving local leaders a lever to pull to attract investment in their community, Chapter 313 removes the hurdle of high property taxes to attract more jobs.

The most recent report from the Texas Comptroller shows 509 active agreements across the state, representing an estimated $134 billion of total investment through 2019, reducing tax revenue by approximately $10.8 billion.

How It Works

Chapter 313 gives school districts the opportunity to sign off on a temporary, 10-year limit on the taxable value of a new investment. Known as appraised value limitation, the taxpaying entity enters into an agreement with the school district, agreeing to make a minimum level of investment in the community to create a certain number above jobs above a set wage threshold in exchange for a limit on the taxable value of the new investment in real and tangible property. The limitation agreement can only be used to abate taxes for maintenance and operations (M&O), the interest and sinking (I&S) portion that services debt on bonds remains unlimited.  Essentially, the school district is agreeing to lock in a portion of property tax rates for 10 years, varying from $10 million to $100 million, depending on property values. Companies must make a minimum investment ranging from $1 million to $100 million in manufacturing, research and development, electricity generation, or low emission energy generation, creating at least 25 qualifying jobs in non-rural areas and 10 in rural districts for eligibility. Chapter 313 doesn’t remove property from tax rolls, instead, it delays when the new investments go on the tax rolls at full value. Once an agreement has been reached, it goes to the State Comptroller for review. State law requires the applicant to protect the school district from any loss of state aid resulting from the agreement. Typically, that means the agreements require Payments In Lieu of Taxes (PILOTs), which may not exceed $100 per student or a total of $50,000 each year, which recovers around 40 percent of the tax savings for the project. Because state school funding is based on complicated formula centered around property tax revenue, the gap in funding is filled by the state budget as if the abated value of the business property did not exist. If the property was taxed at full value, tax revenues would increase, reducing state funding. In effect, school districts often receive more money than they would if the agreement were not in place, sticking state taxpayers with the bill. The most recent report from the Texas Comptroller shows 509 active agreements across the state, representing an estimated $134 billion of total investment through 2019, reducing tax revenue by approximately $10.8 billion.

Who Benefits

In the complex world of state and local finance, understanding who benefits from public policy isn’t always cut and dry. What’s clear is that the businesses entering into these agreements with the school districts directly benefit from a lower tax bill. That’s about where direct benefits end. School districts often have an indirect benefit in the form of more funding. Wonky state funding formulas combined with supplemental payments often net the district more than fully taxing the property would. Communities get new high-paying jobs and at least some additional tax revenue.

Who Hurts

Taxpayers across Texas foot the bill for Chapter 313 by way of the state budget subsidizing the lost tax revenue for each school district. Considering most state tax revenue comes from property tax revenue, subsidizing tax abatements merely shifts the burden to some other form of property tax to make up the shortfall. The state has already paid out over $10 billion to school districts with limitation agreements. Estimates show the state will be losing $2.3 billion in tax revenue by 2024. To make up for foregone revenue, the state must cut funding to higher education, health, social services, public safety or raise taxes. A war on property taxes at every level, which have now been capped, means raising taxes in municipalities simply is not an option. Private business profits while the cost is pushed onto the public, creating a messy system of incentives among local districts, state lawmakers, and businesses.

What Supporters Say

Proponents of Chapter 313 say that without the law, businesses would never have invested in the community, arguing that ‘but for’ the abatement, none of the companies would have made the investment decision. Even with Chapter 313, other states offer far more lucrative incentives for businesses than Texas, making the state less competitive. Cutting a deal to gain some additional tax revenue and new jobs is still a net benefit to the community, if the deal is the only way to make it happen, that’s worth the price. They say Chapter 313 has generated more investment in Texas than the cost of lost tax revenue. After the limitation agreement expires, the state benefits from the school district’s additional tax revenue from the full-value property taxes in an enhanced economic climate, lowering state-required funding. Proponents also highlight the program’s transparency, pointing out that every agreement is well-documented and reviewed by the state Comptroller office, which spends nearly 20,000 hours every year assembling publicly released reports on the efficacy and cost of the agreements.

What Critics Say

The clearest argument against Chapter 313 is the program looks mostly pointless when you delve into the numbers. It may offer some benefit, but considering the cost, it’s likely a wash, creating a system of twisted incentives and an overly complex tax structure. A study by University of Texas political science professor Nathan Jensen found that 85 percent of tax breaks granted under Chapter 313 made no difference. After analyzing 257 limitation agreements under Chapter 313, Jansen found that between 85-90 percent of the projects would’ve been located without the incentive. The industries targeted by the law have intrinsic reasons to locate in Texas that go far beyond their tax bill. Texas’ abundant natural oil and gas resources, infrastructure, and regulatory environment offer all the incentive most operations need. High winds and plenty of open spaces make Texas ideal for wind farms.

The twisted incentives mean school districts may not always be acting in the best interest of the state. The Comptroller said as much, writing the giveaways “may not be beneficial to the state,” in a 2010 report. Because the law allows school districts to receive direct supplemental payments from the business operation, they have practically no incentive to refuse the projects.  More than half of agreements waive the job creation requirement, making critics wonder what the point of the law is in the first place. Even when the projects do create jobs, the price is steep. A Comptroller report showed taxpayers were on the hook for $341,363 for every new job created under Chapter 313. Most economic development incentives try to keep subsidies between $10,000 and $20,000 per job.

Even if some economic incentive is necessary for businesses to decide to locate in Texas, critics say Chapter 313 is far too extravagant. Factoring in supplemental payments, businesses often end up paying roughly 50 percent of their tax bill. Critics say if a company can afford to give away 50 percent of a benefit, the benefit is twice as large as it needs to be. Projects, where the abatements have expired, haven’t boosted tax revenue as much as promised. An analysis of the Comptroller’s latest report shows an average of only 42 percent of the original investment is goes to support public education at the end of each Chapter 313 agreement. The taxable value remaining on local tax rolls at the end of the investment is a fraction of the original investment.

Chapter 313 has made strange bedfellows. Both the oil and gas industry and renewable industry in the state favor its extension while liberal and conservative think tanks firmly oppose it.

Current Status

Nearly two decades of debate over the controversial issue have led us here, cutting a lucrative tax break for the business of one of the world’s richest men. Billionaire Elon Musk’s car and battery company Tesla received tens of millions in tax breaks from Del Valle Independent School District in Travis County. The deal will save the company, currently valued at over $200 billion, nearly $68 million over the next 10 years. In exchange, Tesla plans to invest $1.1 billion in a Cybertruck factory, creating 5,000 jobs. Combined with an abatement approved by the Travis County Commissioners, Tesla will save roughly $4.6 million in property taxes each year. While Tesla’s deal for thousands of jobs is a far cry better than most deals cut under Chapter 313, public statements from Elon Musk have critics pointing to the same issues. Musk admitted that when informally polling key members of the Tesla team needed to get the new factory going, Austin was their top pick for relocation if they were to move outside California. Texas was the preferred choice for the relocation before tax abatements were on the table, questioning the need for them.

Ahead of the current biennial Texas Legislative session, Texas State Sen. Beverly Powell, D-Fort Worth, and Texas State Rep. J.M. Lozano, R-Kingsville pre-filed bills to extend Chapter 313 through 2032. Critics say now more than ever the state needs to tackle abatements in light of declining tax revenue wrought by the pandemic. The session runs through the end of May, and while no movement has been made on the bills thus far, experts expect it to be renewed in some form. Chapter 313 has made strange bedfellows. Both the oil and gas industry and renewable industry in the state favor its extension while liberal and conservative think tanks firmly oppose it.


 If Chapter 313 is to continue in Texas, it will likely be updated. Experts first recommend a more rigorous analysis of applications to minimize participation in the program by companies who were planning to move to Texas without the program. Requiring more evidence from companies seeking a Chapter 313 agreement that the benefit is necessary to make the project feasible is a good place to start. As the law currently stands, simply listing other possible locations is all the evidence the school district needs.  Because no school district has an incentive to say no to a Chapter 313 agreement, additional verification of the decision is needed to ensure the decision also benefits the state. The state should audit the efficacy of the program based on more traditional economic development metrics, being sure to weigh the benefits and cost of the program against other forms of incentives, pegging the subsidy per job rate to a reasonable figure as a goal. Texas could end the program altogether, it’s not out of the question. Two decades of debate around the issue have generated plenty of momentum to do so. Cities and the state would still have plenty of ways to offer economic development incentives, they would just take school districts, which have neither the capacity nor aligned interest to make those decisions, out of the process.

Chapter 313 is a complicated issue, making it all that much harder to solve. Simply understanding the law is beyond many voters’ capacity, especially when other issues, like the state’s imperiled power grid, are at stake. Even if someone can understand the wonky math and formulas behind the process, dealing with nuanced tax policy doesn’t create the type of waves most politicians thrive on. Texas is a leader in economic development incentives and job growth for many more reasons than one piece of property tax legislation. Ensuring a prosperous future for Texans requires investing in things that work. The original intent of Chapter 313 may have been to provide some benefit, but the billions in annual cost to Texas taxpayers for subsidizing corporate incentives has become too much to bear.