The Chapter 313 Monster Revives in Texas

You know how in the final minutes of your favorite horror movie, when our plucky heroes kill the beast with a desperate last ditch effort, and the beast goes down, to everyone’s surprise? And then the camera zooms in on the exhausted survivors leaning on one another, only to have a shadow of the beast rise up, unseen, behind them?

“No!” we shout at the screen. “Look up! It’s still alive!”

That’s the call I got last earlier this year from members of a left/right coalition which managed to help – to everyone’s surprise – kill a terrible corporate welfare program called Chapter 313 at the end of the last legislative session, in May 2021.

The Monster Revives!

They are sounding the alarm over proposed rule changes by the Texas Comptroller’s office which they claim will harm transparency and allow the monster – Chapter 313 tax breaks – to rise up, back from the dead.

As of now, the program is set to expire at the end of 2022. In the light of that upcoming expiration, the Texas Comptroller’s office has proposed a change in reporting requirements for the program. 

The Comptroller’s office responded to my query about the changes, asserting that rule changes are meant to respond to the sunsetting of the program, to streamline reporting, to eliminate bad tax valuation data, and that it is following an established procedure for consulting stakeholders in the program. 

So what are critics worried about?

The fiendish Chapter 313 is a tad complicated, but let’s review the basics. A private company (often an energy company, but not always) wants to build a new thing in Texas. It presents a ( fake, according to a Hearst investigation and academic studies) threat that it might build the thing in some other state, so it needs tax incentives like a break on school property taxes in order to invest in Texas.

I say fake because in 85 percent of cases, the companies would have built their thing in Texas without the incentive, according to a report by UT professor Nathan Jensen, a long-time critic of the Chapter 313 program.

So it’s a pure private giveaway to incentivize a company to do the thing it would have done anyway. And you’re paying for it.

Here’s how you’re paying. A local school board approves a 10 year property tax break to build the thing in Texas. This could be worth merely hundreds of thousands of dollars in tax breaks to the company, but for big companies it can be worth tens of millions of dollars over ten years. A database currently maintained by the Comptroller lets you see how much and for how long companies get this incentive.

The Texas Comptroller’s office needs to approve new deals, but historically has given approval in 97.5 percent of cases. So that, in practice, has not been a real check and balance on Chapter 313. 

Part of the evil genius of the program is that the state wholly reimburses the local school district for its 10-years of foregone tax revenue, so school districts almost never say no. And when I say “the state” provides reimbursement, I mean ultimately you, dear taxpayer, reimburse the private company for building the thing it was already going to build in the first place. 

This became such a successful private corporate welfare game using public dollars that by March 2021 there were over 500 active Chapter 313 agreements, and the cost of the program reached over $10 billion in state funds. 

Even with the program currently sunsetted, a gold rush of sorts is currently underway – mostly by energy companies – to apply for the sweet, sweet tax subsidies. The Comptroller’s office website shows 123 new applications submitted in 2021 alone, with more no doubt to come in the year to come.

So here’s where we are in the horror movie, in December 2021. A coalition of both left and right-oriented think tanks had worked closely with a bipartisan group of Republican and Democratic to raise awareness of the Chapter 313 problems, which helped kill it last Spring.

But Doug Greco, lead organizer for Central Texas Interfaith in Austin, said the Comptroller’s rule changes are a prelude to reviving the subsidy, by limiting the public and press’s access to data in the future. “We are under no illusions that there will be an attempt to bring Chapter 313 back in the next legislative session,” says Greco. 

Among the proposed changes would be a decreased requirement to estimate the total value of projects, the number of jobs created, and the end of a centralized database of local school district tax breaks. Each of these elements made it possible in the past for legislators to study the effectiveness of the program. 

Bob Fleming, a leader with The Metropolitan Organization in Houston, a coalition of churches, sees an intentional plan to revive the subsidy program by keeping the public less informed. “Make no mistake, Comptroller Hegar intends to subvert the will of the legislature,” claimed Fleming during a press conference on the issue.

The Comptroller’s stated reason – per its website – for changing disclosure requirements is to “bring the Chapter 313 reporting into the digital age by making access by the public simpler and reducing the burden on school districts and agreement holders.” 

Opportunities for public comment on the Comptroller’s proposed rule changes ended December 19. 

The Comptroller’s Communications Director Chris Bryan meanwhile responded that “The agency is committed to making changes in a collaborative way that provides the legislature and the public the information they need to make informed decisions regarding the manner in which tax dollars are spent.”

In the light of the current surge underway of new applications before the end of 2022 deadline, the rationale for “winding down” reporting requirements is odd. Chapter 313 subsidies continue for 10 years at a time, so reporting less information until 2032 doesn’t seem to serve the public interest. 

Personally, I was stunned to see Chapter 313 go down in the last legislative session. It was the ideal example of a concentrated private financial benefit understood by insiders (tax attorneys, energy lobbyists) with a diffuse and poorly understood burden paid by the general public (that’s you and me, baby.) Sadly, treating uninformed taxpayers like mushrooms – feed them manure, keep them in the dark – usually works. 

Let’s hope the Comptroller’s office pays attention to recent public comments. We need that office to shine a light on this monster in the dark, as it attempts to stand up after being left for dead.

A version of this post ran in the San Antonio Express News and Houston Chronicle

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Good To Miss The Amazon HQ Sweepstakes

amazon_hq2

amazon_hq2The Amazon HQ announcement is coming to your headlines soon. CEO Jeff Bezos said by the end of the year, even though others believe they’re going to Northern Virginia. I’m thankful neither Houston nor San Antonio played that game, although Austin was named a top-20 finalist.

The game, if you need a refresher, is that Amazon intends to build a new 50,000-employee second headquarters, and invited city and county leaders last year to inundate the company with slavish economic incentives to woo Amazon and those sweet, sweet, jobs.

Economic Development: Left and Right

One of the things I think about economic development incentives, which is clearly quite naive of me, is that partisans on the Left and Right should always, for ideological reasons, oppose targeted tax breaks for specific companies.

On the Right, a targeted tax break incentive seems the very antithesis of free-market capitalism. This involves a government, usually a state or city or county, putting its thumb on the scale to pick winners and losers. Pro-market folks should see this as a clear disruption of the way markets are supposed work. Worse, the incentives usually come with intrusive requirements like minimum numbers of jobs created, minimum salaries, and further government interference. From a free-market perspective, when the government picks winners and losers we get a bad mixture of misallocated resources and opportunities for corruption.

To the Left, a targeted tax break for a specific company should appear as clear corporate welfare. When a government cuts property taxes or other fees for a specific business, the small number of capitalist owners of that specific company get a direct benefit to their bottom line, while the general population bears a greater burden for all the rest of the taxes.  That’s the very definition of benefitting the few on the backs of the many, and should present clear problem for ideologues on the Left.

Setting aside my naïve brain, however, it seems like both the givers of government largesse and the recipients of the largesse believe in tremendous personal benefits from economic incentives. Meanwhile PR announcements inevitably focus on some amount of “good paying jobs,” or praise the “job-creating government.”

Again, this is just one man’s dumb opinion, but when you incentivize companies to move to your city because of a supposed tax break, and that company is willing to submit itself to a specific requirement for creating a certain number of jobs at a certain salary, there are two highly likely scenarios.

The optimistic scenario is that the company is well-run, planned the expansion anyway with or without government incentives, and is cynically happy to receive government freebies because, hey, free money. That’s at least a clever, but cynical, company.

The pessimistic scenario is that the company makes important executive decisions based on tax incentives. That kind of company will be gone in five years, either because their executives have their priorities wrong and the company is badly run, or because another city or county has another better set of incentives to offer five years from now.

To be clear, I’m confident Amazon is extremely well-run, will extract maximum value from its already preferred and chosen location, and they’re interested in incentives because, hey, free money.

The Academics’ View on Economic Development Incentives

UT Austin Professor Nathan M. Jensen and Duke University professor Edmund J. Malesky recently published a book Incentives To Pander: How Politicians Use Corporate Welfare For Political Gain addressing these problems. They review what economists already know, which is that there’s scant evidence that economic incentives work. Or if they work, the public benefit cannot be justified by the public cost.

Their study focuses less on the economic case for incentives and more on the political advantage city and county leaders get by offering these corporate goodies. It doesn’t matter so much that incentives don’t work, but rather it matters that voters think they work. And voters have far less information than leaders, so generally can’t prove that incentives don’t work.  Jensen and Malesky further argue that even an unsuccessful attempt to woo a company with tax breaks, for example, helps a political leader, because they can at least claim to have “tried their best.”

One Mayor’s View on Amazon

In the light of Jensen and Malesky’s book, and leaders’ incentives to pander, San Antonio Mayor Ron Nirenberg and Bexar County Judge Nelson Wolff’s early and decisive NO to Amazon HQ in October 2017 stands out as particularly courageous.

Nirenberg_Letter_to_AmazonI asked Nirenberg recently whether he had any regrets about declining to compete for Amazon HQ. His short answer is, no, no regrets.

His longer answer is that they didn’t so much say no to Amazon as they started a different economic opportunity conversation about what San Antonio has to offer.

“With respect to HQ2 and the sweepstakes, that narrative of San Antonio’s bright future is weaved right into it. When the stories are written about the Amazon RFP, there is a subplot, which is San Antonio’s response,” Nirenberg said.

I have to say, because I hate incentives so much, that it’s refreshing to see an earnest refocus on the economic advantages of a place rather than dangling public goodies to a private company.

Nirenberg continued, “We are investing in the fundamentals in terms of housing, water supply, a reliable energy grid. And we have a workforce that mirrors what the rest of the country will look like 20 years from now. We are making investments in that workforce before most cities have even woken up to that reality.”

Says Nirenberg, “if a company is interested in a 5-year return, and cashing out, there are many other cities.  But if companies are interested in the 30-year return, I feel the fundamentals of our city are extremely competitive.”

Brother, can I get an Amen? This is the kind of talk professors Jensen and Malesky would welcome.

Northern Virginia, early congrats on your future “win.”

 

Please see related posts:

Need Transparency on Economic Development Taken To Eleven

Amarillo By Mornin’ – Stadium Building

Economic Development for Solar – Turtles All The Way Down

 

 

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