At this morning’s Senate Business & Commerce Committee hearing on HB 5, the new school tax incentive program, Chairman Schwertner laid out a substitute that makes substantial changes to the version that passed the House. As we only received a copy of the substitute just prior to the hearing, we haven’t had time to completely digest those changes. Nevertheless, here is what we see so far:
- The substitute significantly narrows the list of projects eligible for the abatement. Whereas, for example, the House version applies broadly to manufacturing projects described by NAICS 31-33, the Senate version only applies to a petrochemical manufacturing facility or semiconductor manufacturing facility. Like the House version, the substitute focuses on “grid reliability,” though in a more limited fashion in that it excludes energy storage facilities (e.g., batteries), natural gas compressor stations and storage facilities (although LNG export terminal facilities are covered), and gas processing plants.
- As opposed to the House version, which bases the required jobs on school district wealth, the substitute ties the job numbers to county population and significantly increases those numbers. For example, at the upper end of the scale, an applicant will have to create 150 jobs in a county of at least 750,000. By contrast, in the House version the required number is 50 jobs in a school district with at least $10 billion in taxable value. At the next level (a county with between 250,000 and 750,000), the applicant is required to create 100 jobs versus 40 jobs. Even at the lowest end in rural counties, the job number is 20, as opposed to 5 in the House version.
- The substitute likewise raises the minimum required investment to qualify for the incentive, from $100 million to $200 million at the high end and from $10 million to $20 million at the low end.
- Among the most significant change in the Senate version is the elimination of tax savings sharing between the applicant and the school district. Whereas the House version establishes a statutory formula by which a school district receives part of the applicant’s savings through an ascending scale formula based on the amount of the applicant’s savings (not to mention a fairly significant application fee the applicant must submit to the district), the substitute eliminates payments to school districts altogether and pretty much abolishes the role of consultants in the process. If the Senate version ultimately prevails, this is a sea change in the way that the program works and who is involved in it.
- The Senate version further overturns the traditional application process. The House version relies generally on the same process as the old program, in which the applicant applies to the school district, the district sends the application to the comptroller, the comptroller recommends for or against, and the school district approves or disapproves. Under the substitute, however, the school district gets cut out of that process altogether. The applicant will apply directly to the comptroller, who reviews the application and recommends approval or disapproval to the governor. At least twice each year, the governor must submit a list of projects to an oversight committee consisting of three House members, three senators, and a House chair in odd-numbered years and a Senate chair in even-numbered years. The oversight committee has the discretion to disapprove of an application, which kills it for good and for all.
- How the Senate version handles the agreement, which under the House bill is between the school district and the applicant, is particularly interesting. If an application actually makes it through the multiple levels of approval required in the Senate bill, an agreement may (not shall, as in the House bill) be entered into between the governor, the school district, and the applicant. The upshot of this provision is that the district, which had no role in the application process (and therefore no skin in the game), has the power to kill the project at the back end.
- The substitute makes an entity ineligible for the incentive if the entity is ineligible to receive a state contract or investment under several chapters of the Government Code: 808 (prohibited investment in companies that boycott Israel); 809 (financial entities that boycott energy companies); 2207 (prohibited investment in an organization designated as a foreign terrorist organization); 2271 (barring governmental entities from contracting with entities that boycott Israel), and 2274 (barring governmental entities from contracting with professional sports teams that don’t play the national anthem). The substitute further disqualifies an entity owned or controlled by a citizen or government identified by the U.S. Director of National Intelligence as a country that poses a risk to national security.
The stark differences between the House and Senate versions of the bill promise a very eventful conference committee, should the bill emerge from the Senate in the coming days. Needless to say, the limited scope of the Senate version, its much higher job and investment thresholds, the approval process chock-full of political landmines presents a challenging, but perhaps not insurmountable barrier for business. That being said, the Senate version preserves the nucleus of an effective incentive, moves the program to the state level, and gives the legislative branch a role in bringing projects to the state that it has never enjoyed before. Seen from that perspective, the Senate version offers encouragement that a deal can be struck that benefits economic development and creates a politically popular program going forward.