Planning for the Sunset of the Chapter 313 Value Limitation

On May 31, 2021, the 87^th Texas Legislature concluded without taking action on several bills that would have addressed an extension of the state’s most prolific economic development incentive program, the Chapter 313 school value limitation. The Chapter 313 program (“313 program”), which is scheduled to sunset on December 31, 2022, provides school property tax relief on a variety of capital-intensive projects, specifically by limiting the appraised value of certain qualified property improvements as they relate to the maintenance and operations (M&O) portion of the total school tax levy, while still paying the full amount of the interest and sinking (I&S) rate.

Chapter 313 awards are most often granted to companies that commit to developing major manufacturing or utility-scale energy projects in the state. The program has been contentious in recent years as not all areas of the state benefit equally from the large projects the program typically attracts. Under the current program rules, the more students a school district has, the more capital a company must invest to receive a value limitation. Each district has their own minimum qualified investment thresholds, ranging from $10 million (mn) up to $100mn. Districts with higher minimum qualified investment thresholds, which usually correspond to higher value limitation amounts, are less likely to attract transformative projects as the overall benefit to a company is reduced. School districts that do attract projects are often enthusiastic about the 313 program because any property tax revenue they forgo by granting approval of a Chapter 313 application is made whole by the state. The district also receives a lucrative annual supplemental payment that averages 40% of the net tax benefit generated by the value limitation.

Several bills in the 87^th Texas Legislature would have extended the existing 313 program between two and 10 years, contingent upon various provisions of the proposed bills, with one including a cost-benefit study that would have analyzed the economic impact of the 313 program on the state. The Legislature’s failure to address a revision to, or extension of the 313 program, has prompted the Texas comptroller to issue new guidance on the program’s expiration, including deadlines by which companies should apply to successfully secure a Chapter 313 award. Among the changes are:

Amending or Extending Existing Agreements

• The comptroller will consider amending agreements after the expiration of the program (officially December 31, 2022) but only amendments that would result in less revenue forgone by the state.
• The comptroller will only consider amendments to pending applications or existing agreements that reduce applications or agreements in size, scope or timeline.
• The comptroller will not approve any application or agreement amendment that results in a higher gross tax benefit to the applicant/agreement holder.

New Applications

• Companies seeking Chapter 313 agreements with the state are encouraged to apply in a manner that contemplates any potential expansion or additional investment phases that may occur.
• Applications must be submitted, reviewed and approved by the comptroller, and executed by the local school board and company executives before December 31, 2022.
• The practical deadline to ensure the requisite reviews, approvals and signatures are obtained is June 30, 2022. Any applications submitted after June 30, 2022, carry a significant risk of not being approved by the comptroller and local school board.

It is possible that some special timing scenarios or extenuating circumstances may arise out of the new or existing Chapter 313 applications, but those instances would be addressed by the comptroller on a case-by-case basis. The vast majority of applicants should consider June 30, 2022, as the practical deadline to meet the comptroller-recommended timeline. Furthermore, it is not expected that the Texas Legislature will address the 313 program again in the ongoing special legislative session, and any subsequent revival or replacement of the 313 program would occur, at the earliest, in the next regular legislative session in 2023.

Many school districts, economic development organizations, communities and companies in Texas have utilized the 313 program to secure major, landmark investments from manufacturers and energy producers, including tens of billions in capital investment and the creation of tens of thousands of high-paying jobs. Given its relatively high property tax liabilities compared to other manufacturing and energy-dense states, many constituents in Texas will be distressed by the loss of this valuable incentive tool, which could eliminate their state as a location for high-profile projects currently engaged in multi-state site searches.

As a result of the 313 program’s scheduled elimination and anticipated rush of applications to the comptroller, it is strongly encouraged that any client considering a large capital investment in Texas should immediately contact its site selection and incentives advisors to discuss the best strategy for applying for and maximizing potential Chapter 313 benefits, prior to the recommended application deadline of June 30, 2022.