Texas enacts changes to property tax abatement and enterprise zone incentives

On June 9, 2023, Texas Governor Greg Abbott signed legislation, H.B. 5, creating property tax incentives to businesses investing in new construction within the state.¹ Enacted by the Texas Jobs, Energy, Technology, and Innovation Act, the new Chapter 403 abatement replaces the Chapter 313 property tax abatement which had expired on Dec. 31, 2022, after being renewed several times since its creation in 2001.² In addition, on June 12, 2023, Governor Abbott approved legislation, H.B. 1515, which amends the enterprise zone program to include qualified employees who work remotely provided they are Texas residents and live within 25 miles of the project site.³

Chapter 403 Abatement

To be eligible for the new Chapter 403 abatement,⁴ which is effective Jan. 1, 2024, an applicant must meet several minimum criteria.⁵ The applicant must construct or expand an existing facility which is used for manufacturing, electrical generation or the development of natural resources.⁶ Facilities where research and development are conducted, and the construction or expansion of critical infrastructure are also eligible for the abatement.⁷ Non-dispatchable electric generation facilities and electric energy storage facilities are expressly excluded from Chapter 403 abatement.⁸ Also, renewable energy sources and battery electric storage facilities are not included as eligible projects. Renewable energy projects and battery electric storage facilities had made up about two-thirds of the awardees under the Chapter 313 program.⁹ To qualify for the Chapter 403 abatement, the applicant must also both make a minimum capital investment and create a minimum number of jobs based on the population of the county in which the project takes place by the end of the first tax year of the incentive period.¹⁰ These minimums are:

Tax benefit

The Chapter 403 abatement allows companies to abate 50% of the value of the real property for the purposes of school property taxes covered by their abatement agreement.¹² If the project is located in a designated opportunity zone, 75% of the taxes are abated.¹³ The abatement lasts for 10 years beginning at the construction completion date.¹⁴ The state pays the schools a portion of the revenue forgone by the incentive. The new Chapter 403 abatement is scheduled to expire on Dec. 31, 2033.¹⁵

Procedures and penalties

Under the new Chapter 403 provisions, the school district in the area must hold public hearings before deciding whether the project should be considered by an oversight committee.¹⁶ Payments in lieu of taxes (PILOT) agreements are also forbidden under the legislation.¹⁷

The new Chapter 403 abatement includes a penalty if the applicants do not meet their job creation and wage commitments in two consecutive reports.¹⁸ With respect to job creation, the penalty is based on the difference between the actual jobs created and the job commitment.¹⁹ Furthermore, if the applicants do not meet the average annual wage commitments in their incentive agreement, they must pay a penalty based on the difference between the actual average annual wage paid to employees and the average annual wage in the incentive agreement.²⁰ The penalty is capped at the total tax benefit of the incentive.²¹

Differences between Chapters 313 and 403

The table below summarizes the key differences between the Chapter 313 and 403 abatements:

Texas enterprise zone changes

Under H.B. 1515, Texas’ multibillion dollar incentive program is set to change to better accommodate remote workers. The enterprise zone program grants sales tax refunds to companies through a competitive process which tests companies on several criteria.²² One of the critical components of the program is the requirement to create or retain jobs.²³ Each employee considered to be a “qualified employee” for purposes of the benefit either must work at least 50% of their annual hours at the project site, or if engaged in the transportation of goods or services, the employee is required to report to the project site and reside within 50 miles of the site.²⁴ Meeting the on-site requirement created serious difficulties for awardees to realize their incentives following the start of the COVID-19 pandemic when remote work became substantially more commonplace. In response to this issue, the legislation expands the definition of “qualified employee” to include remote employees provided they: (i) engage in services off-site; (ii) are assigned to the project site; and (iii) reside within 25 miles of the project site.²⁵ However, the legislation adds the condition that a “qualified employee” be a Texas resident.²⁶ The changes to the law will take effect on Sept. 1, 2023.

Commentary

The new Chapter 403 abatement preserves some of the benefits of the Chapter 313 property tax abatement but may be more difficult to attain. The eligibility requirements have been tightened and the amount of the benefit has been reduced. Furthermore, school districts may be less eager to enter into abatement agreements given that they can no longer receive PILOT payments and must face a public comment period. However, for projects of significant scale, the tax savings could still be substantial and worthwhile to pursue. 

The changes to the Texas enterprise zone program will allow applicants to receive the full value of their awarded incentives while still accomplishing the program’s goals of creating high-quality jobs in and directing substantial capital investment to communities which need it. By requiring eligible employees to be Texas residents and live within 25 miles of the project site, the economic activity generated from these projects is likely to stay substantially within the areas where the projects take place. This would not necessarily be the case if workers living hundreds of miles away from the project remained eligible for the program’s benefits. In this way, the bipartisan effort to amend the law remains a valuable incentive for businesses operating in the post-COVID-19 environment where remote work is far more common while also being a valuable tool for the state to accomplish its policy objectives.

1 H.B. 5, Laws 2023.
2 Former TEX. TAX CODE ANN. §§ 313.001–313.171.
3 H.B. 1515, Laws 2023.
4 TEX. GOV’T CODE ANN. §§ 403.601–403.623.
5 A formal application must be filed with the Texas Comptroller. TEX. GOV’T CODE ANN. § 403.607.
6 TEX. GOV’T CODE ANN. § 403.602(8)(A).
7 Id.
8 TEX. GOV’T CODE ANN. § 403.602(8)(B).
9 Report of the Texas Economic Development Act, Texas Comptroller of Public Accounts, Jan. 2023.
10 TEX. GOV’T CODE ANN. § 403.604.
11 TEX. GOV’T CODE ANN. § 403.604(b). If an eligible project is located in more than one county, the jobs and investment requirement applicable to the project is determined using the jobs and investment requirement applicable to the county with the smallest population in which any part of the project is located. TEX. GOV’T CODE ANN. § 403.604(e).
12 TEX. GOV’T CODE ANN. § 403.605(a).
13 Id.
14 TEX. GOV’T CODE ANN. § 403.613.
15 TEX. GOV’T CODE ANN. § 403.603.
16 TEX. GOV’T CODE ANN. § 403.611.
17 TEX. GOV’T CODE ANN. § 403.612(c).
18 TEX. GOV’T CODE ANN. § 403.614.
19 TEX. GOV’T CODE ANN. § 403.614(a).
20 TEX. GOV’T CODE ANN. § 403.614(b).
21 TEX. GOV’T CODE ANN. § 403.614(c).
22 TEX. GOV’T CODE ANN. §§ 2303.405; 2303.505.
23 TEX. GOV’T CODE ANN. §§ 2303.401; 2303.402.
24 TEX. GOV’T CODE ANN. § 2303.003(7).
25 TEX. GOV’T CODE ANN. § 2303.003(7)(D)(iii).
26 TEX. GOV’T CODE ANN. § 2303.003(7)(A).