By Carine Martinez-Gouhier and Vance Ginn
Imagine: You own a business. You love what you do, the opportunity to employ people, and satisfying customers. But the cost of doing business is escalating as local property taxes increase.
Down the road, a large corporation started construction of a new building. They considered other locations before choosing your community. That corporation received a tax abatement with the school district. That means for 10 years, they will pay only a small portion of taxes due without abatement. Meanwhile, your business does not benefit from a tax abatement, and you will likely pay higher property taxes every year.
Even worse, that new corporation may compete directly or indirectly with your business.
If that sounds frustrating, or outright unfair, it should. Yet, it happens often using Chapter 313 of the Texas Tax Code.
Actually, it could soon happen in your backyard.
The Ector County Independent School District Board of Trustees received a request by 174 Power Global Corporation to conduct a public hearing on an application under that chapter, also known as the Texas Economic Development Act. The company seeks a 10-year, 100 percent tax abatement for a solar energy project that may bring a $50 million investment and create two full-time jobs, according to documents submitted to the school district.
Tax abatements like this are nothing new and are justified under the guise of economic development.
The Texas Comptroller reports that 53 percent of these tax abatements in 2016 were for renewable energy. Renewable energy projects received 25 percent of the total estimated gross tax benefits but represented only 11 percent of jobs committed for creation.
Supporters argue tax abatements increase tax revenue and foster job creation through new investment by businesses. However, these tax abatements exemplify why we should pay close attention to not only effects that are seen, but also those that are unseen.
If these new businesses create permanent jobs, demand for basic government services may grow. If the businesses responsible for this demand pay lower taxes than existing businesses, current businesses – and individual taxpayers – foot the bill.
In addition, the exempted property value under such an agreement is excluded from school finance formulas that determine much of the funding for school districts. The Legislature generally covers declines in a district’s revenue, thereby forcing taxpayers statewide to pay more for certain districts that provide tax breaks to favored businesses.
School districts can also negotiate “supplemental payments” from businesses applying for an abatement. These payments are paid outside the school finance system.
Hence, school districts are incentivized to accept all tax abatement applications because they can replace lost local revenues with state dollars and can get supplemental payments.
And what do communities gain by offering such tax incentives? It’s probably not as much as they may think.
A recent study by Dr. Nathan Jensen of the University of Texas at Austin examined the bargaining power between school districts and businesses with plans to expand or relocate in Texas. Using supplemental payments as a percentage of the preferential tax treatment businesses were ready to give up, and a survey of economic development professionals, he concluded that around 85 percent of these businesses would have come without an abatement.
A bill passed last session tried to remedy another problem resulting from such tax abatements.
The legislation modified Chapter 313 to prevent wind energy companies from receiving tax abatements for wind turbines built within 25 nautical miles of military aviation bases. Offering preferential tax treatments in areas close to these bases often encouraged businesses, including wind energy businesses, to locate there despite challenges for flight operations, such as radar interference.
These costs to taxpayers highlight why government, including your school district, shouldn’t be in the business of economic development. Government should preserve liberty, not favor a few, politically connected businesses at the expense of all other taxpayers
Texas should repeal tax abatements like these and other corporate welfare programs while focusing on reducing government spending and tax burdens so everyone has more opportunity to prosper.
Carine Martinez-Gouhier is a research analyst and Vance Ginn, Ph.D. is a senior economist and director of the Center for Economic Prosperity at the Texas Public Policy Foundation.