Chapter 313 of the Texas Tax Code is an often misunderstood, yet invaluable tool that has enabled the Houston Ship Channel Region to recruit many quality companies and helped existing companies expand operations here instead of locating elsewhere.
Recently, business incentives have been given a “bad rep” in the news media. However, it is opportunities like the 313 agreement that can make or break a deal in a community.
First, it is important to understand how Texas schools are currently funded. Texas schools are, for the most part, funded through a combination of state funds and property taxes collected by local school districts. In most cases, there are two separate school-related tax rates; one for Maintenance and Operations (M&O) and one levied to take in money required to service bond-related debt – called Interest and Sinking (I&S).
“What many do not realize,” explains local property tax incentive consultant Dale Cummings, partner at Cummings Westlake LLC “is local school districts often do not retain all the tax funds they collect. The funds a school district is entitled to is dependent on the district’s property value per student. This amount is set by the state. Any monies collected on property value above and beyond this goes to the state for disbursement to less wealthy school districts.” The system of school district funding means that certain school districts collect more in school taxes than they are able to keep.
Enter the Chapter 313 agreement. Simply stated, Chapter 313 is a program to limit school district M&O taxes for eight years after an initial two-year qualifying period. How does this work?
After the qualifying time period, the company’s property value for M&O purposes is limited to a certain threshold which varies from school district to school district. In addition to the M&O taxes paid to the district based on the value limitation, the company also makes a payment in-lieu-of taxes to the district for a portion of the tax savings achieved. The payment in-lieu-of tax is typically the lesser of a percentage of the company’s tax savings or $100 per student, a cap established by the Texas legislature. Payments-in-lieu of tax enable school districts to retain money that would otherwise be redistributed to other districts by the state. The school district is reimbursed by the state for the M&O taxes foregone by virtue of the agreement. Companies who enter into Chapter 313 agreements still pay the full amount of I&S taxes. In short, Chapter 313 agreements can keep a greater percentage of funds in the local ISD.
This opportunity is only extended to capital intensive, projects that are large in scale and will generate a certain number of jobs (as defined by the state on a per project basis). The opportunity is available to companies new to the region and expansion projects. It would be a mistake to assume because a company has a facility in this region, that facility would be automatically expanded. In most cases these companies have sites in multiple locations within Texas and in other states and those locations are real contenders for expansion as well.
Chapter 313 can help tip the scales in favor of local expansion. This region is regularly competing against other locations with more aggressive incentive and abatement programs. Without 313 agreements, our region would be less enticing to big businesses and we could lose important projects to Louisiana and other states.
A Success Story
La Porte Independent School District (LPISD) is leading the Ship Channel area in effective use of this incentive with eight current or pending agreements. Deer Park ISD has one agreement in place and one pending application. Goose Creek ISD has five current or pending agreements as well.
Even before a project is completed, communities like La Porte, benefit from the indirect jobs created in the construction and related industries. In total, these projects account for nearly $1.85 billion dollars in capital investment.
There is a very real possibility that without the Chapter 313 incentive, this development could just as easily have located elsewhere. While most of these companies already have facilities within the boundaries of LPISD they also have facilities in other locations that are also competing to win these same projects. As LPISD Superintendent,
Lloyd Graham, explains: “These industries probably would not have located in La Porte had it not been for the ability of our school district to enter into Chapter 313 agreements with them.” Graham further emphasized the number of jobs and the increase in tax base, in addition to the increase in funds the school district receives, as by-products of these agreements and the community will continue to benefit from them for years to come.
The petrochemical and refining industry, as a whole, can claim one of the highest ratios of indirect jobs, with between 5 and 8 indirect jobs created for each direct job. The agreements entered into by LPISD will not only bring 150 new direct jobs and up to an additional 1,200 indirect or induced jobs to the region in construction, plant services, safety, and environment, but will also support jobs in the restaurant, retail, and entertainment industries which support the lifestyles of these new workers and the community at large.
For more information, please visit the Economic Alliance Houston Port Region’s website.