Tax Incentive

Chapter 313 Value Limitation Agreements:

Chapter 313 is the economic development section of the Texas Tax Code that addresses special property tax provisions regarding local taxation. These pertain particularly to independent school districts (ISDs) within the State of Texas.

How the agreements work
  • A large-scale project developer intending to make a significant capital investment applies to a school district for a value limitation of the new assets contemplated within the ISD boundaries.
  • The Application requires a disclosure of capital investment, a project completion schedule, and the number of jobs that will be created.
  • The ISD (or its consultant) reviews the financial impacts to the district. If accepted, the ISD sends the application to the state comptroller for review.
  • The comptroller's office reviews the application for completeness and performs an economic impact analysis. They also seek input on the application from the Texas Education Agency (TEA).
  • The comptroller makes a recommendation to the ISD (non-binding) to accept or reject application.
  • The ISD board then decides whether to approve or reject the agreement.
What the agreements do
  • By statute, the property wealth of the ISD determines the value level of the asset for tax purposes. Most rural ISDs fall within the $10,000,000 wealth category, meaning that $10 million is the lowest amount they can list the asset on the tax rolls. (Note: some wind projects have been built in places with a $5 million limit and some in places with a $30 million limit.)
  • The law requires that the developer build a project of greater value than the limit. For example, if the ISD limit is $10 million, a developer must construct a project that is valued at least at $10,000,001.
  • The law requires a minimum number of jobs, but an ISD may waive the job requirements if a project is determined to meet industry standards. This is important for wind project developers because large wind facilities often cross ISD boundaries. In the past, such projects were required to choose which district to apply in, or trigger a requirement to have multiple times the number of jobs necessary. However, this problematic requirement has been resolved by allowing ISDs to waive the jobs requirement in such a case.
What developers pay
  • Value limitation agreements vary by county, so there are different permutations. One example is the following:
  1. In the first two years of operation, the projects pay their full tax rate.
  2. In years 3-10, the project is taxed at the minimum value. (i.e., if the limit is $10 million, the project owner would be taxed at the ISD rate x $10 million, thus limiting the total value taxed)
  3. After year 10, the property is taxed at full-value.
  • In addition to the taxes paid, projects typically make direct payments to the ISD during the abatement period. These are called payments in lieu of taxes or PILOTs. PILOT payments usually equate to 40% of the taxes saved to the project. This is not subject to recapture and is often placed in a foundation or other account administered by the ISD.
Why the agreements are important
  • The Chapter 313 Value Limitation Agreement is the only mechanism that allows rural school districts to benefit from local development in their area.
  • If the ISD is "property-poor," new dollars would only offset existing funding per child; excess funds would be sent out of the district.
  • If the district is "property rich," all new investment dollars would be sent out of district without these agreements.
  • In many cases, a single wind project can alter the classification of a small district from property poor, to neutral or wealthy without these agreements.

CHAPTER 312 TAX ABATEMENT PROCESS

  • A county, municipality or other governmental body must first adopt guidelines and criteria for entering into tax abatements.
  • The body must then pass a resolution declaring itself eligible.
  • An applicant must make an application to the body for the tax abatement.
  • Abatements by statute are limited to a 10-year duration, and any breach by statute requires recapture rights for the entity granting the abatement.
  • If the county chooses to move forward, they must publish notice in the paper seven days in advance and hold a public hearing on creating a reinvestment zone. Members of the community have the ability to offer input into the process in this forum.
  • If the body creates the reinvestment zone, the body can then act on the application, approve an agreement and authorize signature of that agreement.
  • Prior to voting on any agreement, the granting entity should send out a copy of the proposed agreement to all other taxing entities in the area.
Basic structure
  • Wind projects typically lease land from landowners who get a royalty payment based on the power produced on their property.
  • Wind companies OWN the improvements (turbines, substation, etc.) which are placed on the land.
  • Projects are classified as real property currently and are eligible for the abatement because the statute explicitly authorizes abatements on real property.
  • County agreements usually take two forms:
  1. Counties grant a 10-year 100% abatement and receive a payment in lieu of taxes. This can help eliminate risk for financiers.
  2. Counties grant a 10-year abatement with a sliding percentage. For example years 1-5 are 65% and years 6-10 are at 50%. Counties have full discretion to negotiate the best deal they can.