Texas’ Ace In The Hole

The Jobs, Energy, Technology, and Innovation Act poises the state for future business growth.

When Texas Gov. Greg Abbott and the Professional Golfers’ Association (PGA) of America announced in 2018 that a new $520 million PGA headquarters was relocating to Frisco from Palm Beach Gardens, Florida, tax incentives to land the deal weren’t in the talking points but could have been. Although the PGA of America committed $30 million to build its 100,000-square-foot modern headquarters that opened earlier this year, the local community and the state of Texas played a significant role in making the project a reality.

As development continues on the 660-acre PGA campus, Abbott and state leaders are basking in the glow of Chief Executive magazine’s ranking of Texas as the number one state for business for the 23rd consecutive year. Abbott also picked up yet another Governor’s Cup for the mantel—the 11th in a row—from Site Selection magazine recognizing the state’s phenomenal success in attracting business investment.

Just last year, Texas leapfrogged California and New York as home to the most Fortune 500 companies in the country—55—and attracted more than 1,000 corporate relocations and expansions, according to Fortune magazine.

Meanwhile back in Frisco, the city, its school district, and local economic development organizations have contributed a total of about $34 million in tax incentives—or abatements—to attract the project. According to the Frisco Economic Development Corporation, Frisco will also provide performance incentives of up to another $74 million. As a final sweetener, the state of Texas will allow PGA Frisco to run without hotel or sales taxes for a decade, along with waived mixed beverage taxes, for another $62 million in savings over the first 10 years. Those numbers, along with an ample workforce pool, were enough to close the 2018 deal for a city of just 225,000 residents.

The state’s Texas Enterprise Fund also kicked in another $1.5 million to create at least 100 jobs at the new facility.

It’s all about the job market as the driver of the Texas economy and the resulting revenue growth that makes these deals possible. According to recent employment data from the Texas Workforce Commission and the Bureau of Labor Statistics, Texas again leads the nation for job creation over the last 12 months, adding 402,500 jobs from August 2022 to August 2023 and growing at a 3 percent annual rate, the fastest of all states and well above the national growth rate of 2 percent.

The New Act

These are heady times for the Texas business climate, but state leaders are not resting on their laurels. Come January 1, 2024, a modernized tax incentive program kicks off. Passed in May by the 88th Texas Legislature, the Texas Jobs, Energy, Technology, and Innovation Act (JETI) will encourage companies to bring their jobs and capital to the Lone Star State.

Billed as a necessary measure to stimulate economic development and further the so-called “Texas Miracle,” the new incentive amends Chapter 403 of the Texas Government Code to allow tax abatements and other incentives for large-scale corporate development and relocations.

Eligible projects are mostly manufacturing-related or require an investment of more than $1 billion in a Texas school district. Examples include projects that add more on-demand electricity to the power grid, such as a natural-gas-fueled generator or batteries, production of hydrogen fuel, seawater desalination projects, oil and gas facilities, fossil-fuel power generators, and semiconductor fabricators.

The act’s predecessor—Chapter 313 of the Government Code, known as the Texas Economic Development Act—provided similar incentives, but by 2021 when the program came up for statutory renewal, interest groups and politicians on both sides of the aisle argued that the program was a drain on local school funds. The reauthorization effort failed, and Chapter 313 expired in December 2022.

Fast-forward to 2023 and a reimagined economic development tool: On May 28, House Bill 5 passed both chambers of the Legislature and Abbott signed HB 5 into law on June 9, approving creation of the JETI program.

The new program caps a property’s taxable value at 50 percent but can be increased to 75 percent if the project is located in a federally designated “Opportunity Zone.” Participants must create a certain number of jobs based on the size of the project, meet eligibility guidelines, and adhere to reporting requirements.

The business community liked the idea; more than 200 business, trade, and economic development organizations and officials testified or otherwise advocated in favor of the legislation.

A study commissioned by the Texas Association of Business (TAB) found that Texas incentives for manufacturing projects alone generated $13.3 billion in economic activity in 2021, supporting more than 52,000 jobs in Texas.

TAB president and CEO Glen Hamer, said at the time: “The (JETI) Act gives communities the competitive edge to attract major manufacturing projects that create jobs and generate long-term revenue for public services. We urge the Texas Legislature to pass HB 5 to ensure the Lone Star State can maintain its explosive economic growth, promote technological and manufacturing independence from foreign nations, and reshore supply chains.”

To support the case for the program’s positive return on investment, the TAB study cited Tesla Inc.’s recent growth aided by state incentives in 2020. To receive maximum incentive from Travis County, Tesla committed to invest at least $2 billion in the project and create 5,000 jobs. Through 2022, Tesla had invested $5.8 billion and created 12,227 jobs.

The program has its critics, too. University of Texas at Austin government professor Nate Jensen challenges claims that incentives are necessary to attract investments. Jensen says his research shows that about 85 percent of Chapter 313 recipients would have come to Texas without an abatement, due mostly to the state’s abundant natural resources and other advantages such as the state’s relatively low cost of living.

In his testimony before the Texas House Committee on Ways and Means, Every Texan senior fiscal analyst Dick Lavine testified, “House Bill 5 is like (Chapter) 313 except it has fewer jobs, lower wages, less accountability and transparency, and it’s more expensive.”

Supporters, however, say the school tax break is a small price to pay for the upside offered by new investment. Advocates point out that relocating enterprises pay a range of other taxes for property and schools, sales taxes, and motor vehicle taxes, and incentives remain necessary for Texas to compete for jobs on a global scale.

The program will be up for renewal in 2036, consistent with the 12-year sunset cycle of state agencies.

Planning for the Future

The state is also investing in economic growth in other ways. For example, the 88th Legislature passed House Bill 8 that invests $691 million in Texas community colleges for a performance-based system to encourage specific skills development to fill modern-day jobs in information technology and other fields poised for future growth.

This is important because, according to the research organization Texas 2036: More and more jobs require a postsecondary credential—anything from a certificate to a bachelor’s degree or higher. At the same time, 90 percent of occupations that require a high school diploma or less also require on-the-job training, which is increasingly provided through formal training programs offered by higher education institutions such as community colleges.

Lawmakers also appropriated $33 million of that $691 million for innovation and collaboration efforts, including to start or expand short-term credential programs aligned with regional and statewide workforce needs.

Lawmakers this year approved investment of more than $200 million of the $691 million into financial aid and student support, with the goal of lowering barriers to a postsecondary education.

Ancillary benefits of the recent wave of big investment in Texas include announcements such as those from Austin Community College, which created a bachelor’s degree program in manufacturing and engineering technology beginning this fall to move working professionals in manufacturing into more advanced career roles and help fill growing workforce gaps in the industry. A goal of programs like this one will be to train local talent—prepared, skilled workers to fill the jobs being created—to work in a particular community.

Other Pro-Growth Policies

The 88th Legislature provided additional tax relief to help the state economy. Working with a $33 billion budget surplus, Texas cut property taxes for residents and businesses by $18 billion.

A residual benefit to property tax cuts is an affordable and stable housing market, which also incentivizes individuals to relocate to Texas, expanding the state’s available labor force.

Two crucial aspects of this tax reform will provide extensive fiscal relief to smaller and medium-size companies. First, the exemption threshold for the state franchise tax doubled from $1.24 million to $2.47 million, removing approximately 67,000 businesses from franchise tax rolls. Another facet of the plan involves implementing a three-year limitation on appraisal increases for commercial and non-homesteaded properties valued at $5 million or less, capping the increase at 20 percent, to provide more fiscal stability and predictability.

The Legislature also made historic financial investments in water, infrastructure, broadband, and space and semiconductor programs.

In further action to ensure businesses operating throughout the state can do so efficiently, the Legislature passed the Texas Regulatory and Consistency Act to eliminate the patchwork quilt of regulations in Texas cities and counties.

By some measures, Texas is already the best state for business, jobs, and opportunity. But creativity and other tools in the Texas incentive toolbox can also play a role and demonstrate the commitment of state and local leaders to Texas’ economic growth. In the case of the PGA re-location, the state collects the hotel occupancy tax (referred to as the HOT tax) and rebates the proceeds to the city of Frisco for 10 years. The city then passes those rebated funds to Omni Corp. along with a portion of the city’s sales tax, hotel tax, and property tax for a 20-year period, according to George Purefoy, the former Frisco city manager who negotiated the deal for the city.

On the final scorecard, the JETI Act is a critical step to promoting economic growth and development, and an example of the state’s commitment to a thriving business environment conducive to investment and growth over the long term.