A bill that seems to have had more lives than a Marvel superhero is now headed to the Governor’s desk after House and Senate conferees struck a deal late yesterday. HB 5, the school tax abatement proposal, appeared to have died when conferees could not agree by the Saturday night deadline for the distribution of conference committee reports. But relentless efforts kept the negotiations alive with hopes of suspending the rules if a deal could be struck.
The deal that was struck synthesizes the House and Senate versions in interesting ways. Without going into the bill in agonizing detail, we aim here to outline the major components of the bill and where things ended up.
Eligible projects. The conference committee report largely adopted the Senate approach, which expands the list of eligible projects to include: (1) a manufacturing facility; (2) a facility related to the provision of utility services, including an electric generating facility that is considered to be dispatchable because the facility’s output can be controlled primarily by forces under human control; (3) a facility related to the development of natural resources; (4) a facility engaged in the research, development, or manufacture of high-tech equipment or technology (what is “high-tech technology?); or (5) a project to construct or expand critical infrastructure (undefined in the bill). The report also took the Senate language unequivocally excluding nondispatchable electricity facilities and electric energy storage facilities.
Qualified opportunity zones. The Senate version increases the amount of the incentive for projects located in “qualified opportunity zones.” Created as part of the federal tax cut legislation in 2017, according to the IRS, a “QOZ” is “an economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as QOZs if they were nominated for that designation by a state, the District of Columbia, or a U.S. territory and that nomination was certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service.” In 2018 Governor Abbott nominated 628 census tracts in 145 counties, about 8% of Texas’s 5,265 census tracts. The Governor’s office has posted a map of the locations of QOZ’s, which are scattered throughout the state, though the work of matching them up with school districts remains to be done. The conference committee report still requires the location of an eligible project in a reinvestment zone or enterprise zone.
Required jobs and investment. The conferees reinstated the county-population based criteria for required jobs and investment that existed in the House bill laid out in House Ways & Means. Ultimately, the House version reverted to the old Chapter 313 formula of basing the numbers on school district property wealth. The conference committee report adopts a four-tier structure: counties of at least 750,000, counties of 250,000 up to 750,000, counties of 100,000 up to 250,000, and counties less than 10,000. The two sides compromised on the required job numbers, raising them from 50 to 75 in the top bracket, and 40 to 50 in the next tier, 25 to 35 in the next, and 5 to 10 in the bottom tier (the House version had an intermediate tier requiring 10 jobs in an ISD with property wealth of at least $100 million but less than $500 million). The increased job numbers will present a challenge for certain types of projects that require heavy capital investment (natural gas processing plants, for example) but may stretch to meet the revised job numbers.
The conferees likewise took the higher capital investment requirements of the Senate bill. Whereas the House version required $100 million at the high end, the Senate doubles that number. At the next level, the Senate raises the minimum investment from $80 million to $100 million, collapses the third and fourth tiers in the House bill (which required $50 million and $25 million respectively) to a single tier requiring $50 million, and doubles the minimum investment at the low end from $10 to $20 million. While the difference in the high-end numbers might not end up being that significant for larger projects, it remains to be seen how the substantially higher required investment in smaller counties (along with the increase in the number of required jobs). It appears plausible that using QOZs as a basis for expanding investments in rural areas, for example, might to some extent be undercut by mandating relative high jobs and investment criteria for those areas. We shall see.
Exception to jobs requirement. The House version exempted from both the jobs and investment requirements a so-called “national or state security or supply chain infrastructure project,” which covered a seawater or brackish groundwater desalination plant and a “grid reliability project,” which broadly included dispatchable electric generation, battery storage, fuel storage, and gas processing plants. When the Senate replaced the concept of “grid reliability” with its own much narrower definition of a dispatchable electric generation facility, it carried over the exemption just to that kind of project and only to the jobs requirement. Thus the heightened jobs and investment in the conference committee report apply to all other energy-related projects that are still eligible. This could pose a problem, as we pointed out earlier, with certain projects that will struggle to meet both requirements.
Construction jobs. The House version allowed applicants to count construction jobs at one-tenth of a full-time job. The Senate version did away with that language. The conferees took the Senate.
Wage requirement. The Senate version raised the required average annual wage for purposes of the jobs requirement to exceed 110% of the average annual wage for all jobs in the applicable industry sector during the most recent four quarters for which data is available, as computed by the Texas Workforce Commission.” The House bill pegged compensation at 110% of the county average annual wage for manufacturing jobs in the county where the job is located. The effect of this change could be very significant indeed, since it would appear to equalize the compensation standard between, for example, a Tesla plant in Austin, and an investment in a county with a potentially much lower cost of living.
Taxable value. The conferees accepted the Senate methodology for establishing the taxable value of eligible property. In contrast to the House version, which established tiers based on ISD property wealth, the Senate version simplifies the matter. A project located in an QOZ will get a 75% abatement, which drops to 50% if not located in a QOZ. This represents a very significant improvement in the amount of the amount of tax savings for a successful applicant. Under the old law, an applicant might expect to reap somewhere around 40%, once revenue protection payments and payments in lieu of taxes to ISDs were taken into account. The conference committee report, other than a $30,000 fee payable to an ISD for considering an agreement, prohibits any such payments to ISDs, dispensing with the House bill’s sliding scale formula for sharing tax savings with the ISD.
ISG. The Senate version that emerged from committee contained very broad “anti-ESG” language, which effectively would have scuttled the whole program. This broad language came out of the bill in a Senate floor amendment. What remains in the conference committee report is a provision barring an applicant that is ineligible to receive a state contract or investment under various statutes aimed at entities that boycott Israel, the fossil fuel industry, or firearms and ammunition manufacturers.
Application process. The House version hewed pretty closely to the application process that existed under the old law: application to the ISD (with a large application fee) followed by comptroller approval. The Senate bill, however, imposed a four-step application process. Under this process the applicant would have submitted the application to the comptroller, who would recommend approval or non-approval to the governor. Once the governor acted (gubernatorial inaction constituted approval), the application would pass on to a legislative committee for a thumbs up or down. Only if approved at that level, would the application go back to the governor and, finally, the school district to do the final deal (which the district could veto). The conferees adopted the Senate approach but with a three-step process. Application is still to the comptroller (not the ISD), who recommends to the governor and notifies the ISD. The governor has 30 days to take action one way or the other. But unlike in the Senate bill, the conferees gave the legislative oversight committee no veto power, only the power to make recommendations to the legislature regarding types of projects that should be added or eliminated from the program.
Another major change from the Senate version is the involvement of the school district. Under the conference committee report, the governing body of the district has 30 days to consider an application sent by the comptroller to take official action whether the district “is agreeable to entering into the agreement . . .” Such action must be taken in a public hearing with at least 15 days’ advance notice. The ISD then provides written notice of its determination to the comptroller, governor, and applicant. If the governor and ISD are “agreeable,” the application moves to the agreement stage.
Determining factor. The House version kept the old law “determining factor” language. The Senate version beefed up this requirement, and the conferees opted substantially for the Senate. The main change here is that “a determining factor” has become “a compelling factor in a competitive site selection determination” and “in the absence of the agreement, the applicant would not make the proposed investment in this state.” The conference committee report further requires the comptroller to “consider factors related to the selection of the proposed site for the project, including the workforce, the regulatory environment, infrastructure, transportation, market conditions, investment alternatives, and any specific incentive information provided by the applicant related to other potential sites.” How much practical difference this “heightened” test might make remains to be seen, but clearly the comptroller has plenty of discretion in applying the “compelling factor” test.
Performance bond. The conferees accepted a Senate provision requiring the applicant to post a performance bond in an amount established by the comptroller “to protect the interests of the state and the district and conditioned on the applicant’s compliance with the terms of the agreement.” It is unclear exactly how this requirement will work, how one might possibly quantify a “reasonable and necessary” amount of security, or who would even fund such a thing. Since the conference committee report gives the governor or the school district the absolute authority to terminate the agreement for noncompliance with the jobs or wage requirements (which is already subject to penalty) and makes the applicant liable to the state for an another penalty equal to all lost property tax revenue from the project plus interest, adding a performance bond to the list would not appear to offer any additional protection and may prove problematic for some applicants to obtain.
Despite the challenges that will exist for some applicants under the new law, it is remarkable that HB 5 is on its way to the Governor at all, much less in the generally positive version that he will presumably sign in the coming days. One cannot give too much credit to Speaker Phelan and his staff, Chairman Hunter, Chairman Morgan, Representative Shine, Lt. Governor Patrick and his staff, and Chairman Schwertner and his staff for committing to get a deal done. We also applaud (standing applause at that) each of the industry and business associations that united in this effort and never gave it up, especially our sister organizations TAM, TTARA, TXOGA, TCC, and TAB, as well as the metro chambers, smaller chambers and economic development organizations all over the state, and school board members and superintendents that spoke out in support of the importance of having an incentive program. Certainly not everybody got everything they wanted, but what they did get is a viable and generally solid bill that keeps Texas at or near the top of state economic development incentives. Considering the political headwinds against which this effort fought all session, HB 5 represents a real achievement.
