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Testimony: House Committee on International Relations & Economic Development April 20, 2022

Texas Conservative Coalition Research Institute

House Committee on International Relations & Economic Development

April 20, 2022

Regarding the Committee’s Charge: Examine current economic development incentive programs and identify opportunities to enhance job creation in Texas. Make recommendations to promote transparency and enhance effectiveness of such programs.


During the 87th legislative session, the Legislature declined to extend the Texas Economic Development Act (sometimes referred to as “Chapter 313”) beyond its current expiration date of December 31, 2022. Chapter 313 has been the state’s largest economic development incentive program for years; it authorized school districts to grant companies a 10-year abatement of school district maintenance and operations (“M&O”) property taxes. Chapter 313 had several legitimate criticisms that emerged over the years. Among other criticisms, the program facilitated lower than anticipated job creation numbers, reinforced the perception that such programs create favoritism towards large companies and renewable energy projects, and never adequately addressed the commonly held belief that companies would not relocate to Texas without such a program in place. These issues, along with a growing sentiment against these types of economic development policies, led to a disagreement over its reform that ultimately led to the decision by the Legislature to not extend the program beyond its expiration date.

While Chapter 313 is expiring,[1] the problem it sought to address—Texas’ high property taxes on businesses—remains. Not only does Texas have high property tax rates relative to most states, but it also has a broader base than most when it comes to commercial property taxes; for example, as of 2020, Texas was only one of nine states that subjects business inventory to property taxes.[i] Although the state has many strong selling points to businesses, such as a sensible regulatory climate and no personal income taxes, its property tax system is undeniably a weak point. The Tax Foundation’s 2022 business climate rankings for states placed Texas 14th.[ii] The state’s relatively high property taxes were a key reason it did not rank higher; Texas ranks 37th if the analysis is confined to commercial property taxation.[iii]

The commercial property tax burden in Texas is particularly heavy for businesses with considerable tangible property, such as machinery, computers, furniture, and inventory. Tangible personal property used in a business (business personal property, or BPP) is subject to property tax to the same extent that real property is. Service-focused industries with relatively little tangible personal property (e.g., a consulting business) are not greatly affected by property taxes on BPP (referred to in this testimony as “the business personal property tax,” or BPPT); however, many industries (e.g., manufacturers) are, and they overlap considerably with the capital-intensive companies whose property tax burdens Chapter 313 was meant to alleviate.


The 88th legislative session will present an opportunity for enacting economic development incentive programs that are superior to Chapter 313. These alternatives could help mitigate the tax burden that capital-intensive businesses face in Texas, thereby making the state more attractive to companies relocating. At the same time, these alternatives could avoid the flaws in Chapter 313; in particular, any alternative to Chapter 313 should be broad-based and not discriminate against smaller companies. To spur still more economic development in the state, the Legislature should consider one or more of the four options discussed below.

First, the Legislature could use a portion of the expected budget surplus to “buy down” M&O school taxes, building on the property tax reforms of the 86th Legislature. The Comptroller predicts that there will be a general revenue-related surplus of $12 billion at the end of the 2022-23 biennium, more than enough to provide significant commercial property tax relief. Notably, this option would provide tax relief to all Texans, not just businesses.

Second, the Legislature could increase the current $2,500 exemption for BPP to a much greater figure. This exemption was just increased from $500 to $2,500 by Senate Bill 1449 (Bettencourt; 87R). While that increase was a welcome change and will save many small businesses from spending time on valuing their property, the relief is not great in terms of dollars. At a total property tax rate of 2.0 percent of taxable property value, this increase results in annual savings of approximately $40. At the same tax rate, an exemption amount of $100,000 (which exists in Idaho[iv]) would provide welcome tax relief of $2,000 annually. Although the fiscal impact of increasing the exemption to $100,000 (or even more) is not clear, Comptroller data suggests that the exemption could be raised substantially even using just a portion of the projected $12 billion surplus at the end of the 2022-23 biennium. In the 2020 Tax Exemptions and Incidence Report, the Comptroller reported that the annual “cost” of the then-$500 exemption in forgone revenue was a mere $300,000.[v]

Third, the Legislature could effectively lower taxes on BPP by changing the appraisal rules to value BPP at less than its fair value, and then holding harmless local taxing units for the forgone revenue. For example, BPP could be valued at 60 percent of its market value, effectively providing a 40 percent tax cut. This approach should not require a constitutional amendment.[vi] Indeed, a bill embracing this general approach was filed in 2017. House Bill 2589 (85R; Button, et al.) would have phased in a dramatic reduction in property tax rates on most types of inventory. This approach would give the Legislature great flexibility; the percentage reduction in valuation of BPP could be determined in light of the state’s budget forecast and tax cuts through reduced appraisals could be phased in over time.

Fourth, the Legislature could exempt BPP from property taxes. Due to budgetary limitations, this approach would probably have to be narrowed somewhat. For example, inventory (a subset of BPP) could be exempted entirely from property taxes, or BPP could be exempted from school district taxes. Each of these approaches, however, would require a constitutional amendment.

Projecting the fiscal impact of this fourth option (or variations of it) is challenging. The starting point of the analysis is the Comptroller’s biennial property tax report.[vii] The most recent report was published in December 2020 and covers the 2018 and 2019 tax years. In the report, the Comptroller divided the taxable property in Texas into various categories. The categories of Commercial Personal Property, Industrial Personal Property, Mobile Homes (and certain aircraft and boats), Special Inventory (which includes vehicle and heavy equipment held by dealers), and Goods in Transit comprise BPP. The estimated school district taxable value[2] of this property in 2019 was $286.24 billion, or 9.86 percent of the $2,904.48 billion total taxable value of school district taxable property in the state. The total property tax levy in the state in the 2019 tax year per the Comptroller was $67.29 billion. Thus, estimated revenue from the BPPT for tax year 2019 was 9.86 percent of that figure (i.e., $6.63 billion).

These numbers largely accord with those presented by the Texas Taxpayers and Research Association (TTARA), which estimated that BPP comprised 9.8 percent of school taxable property in the state in the 2018 tax year.[viii]TTARA also estimates that inventory comprises approximately half of BPP in Texas.[ix]

Of course, property values have risen significantly throughout the state since 2019, resulting in higher property taxes. While total property taxes in the state were $67.29 billion in 2019, unofficial, preliminary data (which will subsequently be adjusted) from the Comptroller suggests that the total property tax levy in the state in 2021 was approximately $76.3 billion.[x] If the percentage of BPP in the state remains 9.86 percent, then an estimated $7.52 billion in property taxes were attributable to BPP in 2021.

A final piece of useful information is the percentage of total property taxes that school district taxes comprise. In 2019, that figure was roughly 53.9 percent. The Comptroller’s unofficial data for 2021 places the percentage at 51.3 percent, a reduction which is unsurprising given the stricter 2.5 percent cap on the annual growth in school tax revenues (as compared to the 3.5 percent and 8.0 percent caps on other taxing units).

Based on the above information, the fiscal impact of various reforms can be estimated as shown in the table below.

Fiscal Impact of Various Modifications to the BPPTl Fiscal Impact (using 2021 as baseline year; amounts would grow

For context, based on the most recent report by the Comptroller on Chapter 313, the revenue forgone under the approximately 510 Chapter 313 agreements in place as of June 1, 2020, was $2.52 billion through 2019. The estimated forgone revenue after 2019 as a result of those agreements is another $8.24 billion, for total revenue forgone of $10.76 billion[xi] (the total revenue forgone post-2019 will actually be substantially more than $8.24 billion, because more Chapter 313 agreements have been and will be executed between June 1, 2020 and December 31, 2022).


The legislature’s goal should be tax reforms that mitigate the perceived need for Chapter 313 and similarly targeted incentive programs. With the looming expiration of Chapter 313 and a projected budget surplus for the current biennium, the Legislature has an opportunity to craft broad-based property tax relief for Texas businesses. Possible reforms include buying down school district M&O rates, effectively slashing tax rates on BPP by changing appraisal guidelines, increasing the exemption amount from the BPPT, exempting inventory from property taxes, or exempting BPP from school district taxes. These reforms would benefit the same types of companies whose high tax burden Chapter 313 was meant to ameliorate; however, these reforms would accomplish that goal without the flaws of Chapter 313. Indeed, they would benefit those same companies that benefit from Chapter 313, but with the added benefit of making all businesses in Texas winners.


[1] It is important to note that the expiration of Chapter 313 means that school districts and businesses may no longer enter into value limitation agreements. However, businesses with a value limitation agreement in place before the statute’s expiration date will still qualify for a 10-year abatement. Thus, Chapter 313 abatements will continue well past the statute’s expiration date. [2] School district taxable values can differ from city and county taxable values because of homestead exemptions that vary based on taxing unit, as well as Chapter 313 agreements. Nonetheless, school district taxable values are a useful proxy for taxable property values.

[i] [ii] [iii] Ibid. [iv] Idaho Statutes, Section 63-602KK, available at [v] Comptroller, Tax Exemptions and Incidence, p. 33 (Dec. 2020). [vi] Compare the holding in EXLP Leasing, LLC v. Galveston Central Appraisal District, 554 S.W.3d 572 (Tex. 2018), available at [vii] Comptroller, Biennial Tax Report, 2018 and 2019 (December 2020). [viii] [ix] [x] (sum of taxes levied by each taxing unit). [xi] (see link to 2021 Summary).


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