Staying in the Game
By: Dr. M. Ray Perryman
Published in syndication June 07, 2023
The Texas economy has perennially been among the strongest performing, winning virtually every accolade for economic development superiority multiple times. While there are myriad reasons for this prowess, one key factor is effective strategies and policies to encourage locations and expansions. The state leads the nation in job creation and has had the most major corporate investments (by a wide margin) for over a decade. Incentives are certainly not the only consideration, but are often the tipping point for success.
One asset in the Texas portfolio is a policy allowing school districts to offer tax incentives for businesses that invest in their communities. The original law (often called Chapter 313 for its position in the tax code) expired last year; it has now been replaced by House Bill 5 (HB5), recently approved by the legislature and on the Governor's desk for signature as we go to press. What's the big deal? Let's briefly explore.
Texas has numerous advantages for mega projects - a large and growing workforce, rich natural resource endowments, port facilities and other infrastructure, and a reasonable cost of doing business and regulatory environment. An area where it does not compare as well involves aspects of the tax code.
The Tax Foundation ranks Texas 13th overall for business tax climate. Strengths include the absence of a personal income tax and unemployment insurance costs. The tradeoff is low marks for corporate, sales, and property taxes. In particular, for capital-intensive industries, such as advanced manufacturing, technology, refining, petrochemicals, and liquefaction, where several firms have recently invested multi-billions in Texas, the decision process would have looked quite different without the availability of property tax relief. These levies fall disproportionately on projects with major facilities and are incurred irrespective of profitability. They are often sufficient to affect reported earnings, stock prices, and, importantly, executive compensation.
It is often seemingly forgotten that the alternative is typically maintaining raw land taxed at very low agricultural values. For a school district, although direct taxes from a new employer are limited for a period, attracting a new facility offers a number of secondary benefits, such as enhancing the demand for housing and other real estate and encouraging collateral activity by suppliers. In addition, large-scale investments ultimately become fully taxable and frequently foster multiple footprint expansions over time.
Irrespective of the merits of incentives in the abstract, the practical reality is that every state uses them. Part of the Texas success story is the capacity to offer reasonable incentives to overcome a notable weakness in an otherwise formidable competitive position. HB5 is not perfect, nor was its predecessor, but it is sufficient to keep Texas in the game, and its passage eliminates a critical gap. Well done! Stay safe!