For well over a decade, Texas schools have been plagued by funding shortages, teacher retention problems, overloaded classrooms and infrastructure maintenance backlogs — in part because of a tax giveaway program that robbed school coffers to deliver billions of dollars in payouts to major oil and gas companies. The old program, known as Chapter 313, provided enormous tax breaks to build everything from liquid natural gas facilities to plastics plants. Amid broad bipartisan recognition of the damaging effect of Chapter 313 on state school funding, and the dubious claims of beneficiaries with regard to their need for tax breaks, the Texas Legislature allowed the program to expire at the end of 2022. But that didn’t stop oil and gas.
Industry lobbyists applied steady pressure for the Legislature to create a replacement — and fast. In March, Republican lawmakers rallied to quickly draft a zombie version of Chapter 313, now renamed Chapter 403, with most of the familiar problems repeated from the old program. Even though semiconductor fabricators were the target of the original Chapter 313 legislation, fossil fuel-related industries that were already in Texas were its major financial beneficiaries, and it was mainly oil and gas lobbyists that led the campaign to replace it. Buoyed by their successful effort to shut down renewal of Chapter 313, activists lobbied hard against the new program. Ultimately, they failed, but their determined effort to educate legislators about the harms caused by school-tax-based incentive programs did result in major reforms, which will significantly curb tax giveaways to industry — if the state enforces them.
That campaign began without fanfare. After 9 p.m. on May 18, Texas state senators filed onto the dais to close out a hearing about House Bill 5, the measure to enact Chapter 403. The oil and gas industry lobbyists in blue serge who had packed the room that morning were long gone, and the room was all but empty. The weary senators and witnesses who had stuck around were all business. Sen. Nathan Johnson, a Democrat from Dallas, and Sen. Lois Kolkhorst, a Republican from Brenham, who’d been most critical of the bill in the morning session, were there to hear testimony from activists who’d been at the forefront of the fight against Chapter 313 and HB 5 for years, including members of the nonprofit coalition Industrial Areas Foundation, and Dick Lavine, a senior fiscal analyst at the watchdog group Every Texan.
Lavine must have felt like a broken record. For probably the 100th time in his career, he recommended that the lawmakers tighten language about what’s known as the “but for” test — which, basically, requires that companies show that they would not invest in Texas “but for” the incentive. Under the old Chapter 313 statute, the comptroller was required to confirm that the incentive was “a determining factor in the applicant’s decision to invest capital and construct the project” in Texas, but the requirement was essentially toothless. Companies were not mandated by law to submit information about competitive siting locations, and the comptroller was not obligated to ask for them. Applicants often used boilerplate language without supplying proof of offers from other states.
The “determining factor” provision should have ruled out oil and gas facility expansions by default, according to Lavine. After all, you can’t claim that you have offers from other states to expand your facilities in Texas. But, as a case involving Houston-based Cheniere Energy shows, the provision was poorly enforced. Cheniere had already made a public announcement that it planned to go forward with a pipeline project from the Permian to its Corpus Christi-area LNG plant well before the comptroller certified three of its Chapter 313 applications last year in the Gregory-Portland Independent School District. Cheniere planned to build three new LNG trains at its existing complex in San Patricio County, where it has pipeline connections and an export terminal for ocean-bound tankers. The additional trains would not be a new project, but an expansion that would not be likely to go anywhere else.
Cheniere’s applications were typical of how companies brushed off the determining factor requirement. “Without the Chapter 313 value limitation, siting the project in Texas is far less attractive,” Cheniere said in a few different ways, but never with evidence to illustrate the claims. “In a capital constrained environment, the economics of each project are challenged against each other and only the best will have a chance to advance.”
Activists scoffed at the idea of a “capital constrained environment.” The Ukraine War and the consequent energy crisis in Europe have created a boom market for the LNG industry, which was already experiencing rapid growth. In 2022, Cheniere managed to pay off over $5 billion in debt, buy back $1.4 billion worth of stock, pay dividends and still turn a $1.4 billion profit. Not bad for a company with just over 1,500 employees worldwide. On a net earnings per employee basis, Cheniere outperformed ExxonMobil — with some 70,000 people on its global payroll — by almost 20% in 2022, and ExxonMobil had claimed a record-breaking $55 billion in profits. Nevertheless, Cheniere, like ExxonMobil, went to Texas taxpayers again last year, cup in hand.
Somehow, none of these facts raised eyebrows with the comptroller, Republican Glenn Hegar, whose office was responsible for reviewing and certifying Chapter 313 applications. (The Comptroller’s Office has not responded to repeated interview requests and specific questions about the process for evaluating whether a company met the “determining factor” requirement.) Gregory-Portland ISD didn’t see any problems, either. Months passed between Cheniere’s pipeline announcement and the school board’s vote to approve their Chapter 313s. There had also been tireless opposition and awareness raising from conservation and watchdog activists, so it’s unlikely that the comptroller and the school board didn’t know about Cheniere’s plans. Regardless, the Gregory-Portland school board approved the deals in the crush before the December deadline.
The watchdog groups testifying before the Texas Legislature urged lawmakers not to repeat these mistakes with Chapter 403.
Lavine was one of 11 witnesses to testify at the very first hearing on Chapter 313 on March 14, 2001, and the only one registered in opposition. “If companies coming to Texas can avoid their fair share of property taxes, other Texans will have to pay more for these critical needs,” Lavine told the House Ways and Means Committee back then.
The Legislature authorized Chapter 313 over Lavine’s lonely protest. When the program came up for renewal in 2013, the problems Lavine predicted had manifested. In particular, the absence of clear and precise language about eligible projects, combined with the comptroller’s permissive approach to certifying applications, had caused the program to swell to enormous scale. “This is a very generous program, and we know this because virtually every company that receives these abatements offers supplemental payments to school districts that are often equal to 40%-50% of the net tax benefit,” Sen. Wendy Davis, a Republican-turned-Democrat from Fort Worth, said during floor debate that year. “If the companies are willing to give away half of their tax benefit then, clearly, those benefits are twice as large as they need to be.”
Sen. Bob Duell, a Republican from Greenville who authored the Senate version of the 2013 reauthorization bill, had tried to reassure Davis. “The Comptroller has to certify,” he said, “what we call ‘but for,’ to make sure they would perhaps not have come here if we didn’t offer this incentive program.” The “but for” test Duell was referring to was new language about the “determining factor” requirement, which had been introduced for the first time that year. Davis wasn’t convinced. She tried to strengthen the “determining factor” language and to require companies to provide documentation to back up their claims about needing an incentive — but she failed. A year later, comptroller staffer Robert Wood gave a Powerpoint presentation at an interim hearing of the House Economic Development Committee, where he testified that a company could meet the “but for” standard by asserting “that the project is not financially feasible without the limitation.”
“They were really stretching it,” Lavine said. “It didn’t say anywhere that the abatement existed so a company can make more money.” (Capital & Main requested comment from the comptroller about Wood’s presentation and a list of projects that were denied certification because they failed to pass the “but for” test, but received no response.)
A decade later, the cost of new agreements had ballooned by more than $20 billion. In the late-night hearing on May 18 of this year, Sen. Johnson said he wanted a better way to assess whether a given incentive was a good investment of taxpayer dollars on a project that would not come to Texas without one. “What could help us feel more certain,” he asked Lavine, “that it’s ‘the’ determining factor or even ‘a’ determining factor?”
“The comptroller should ask what other bids they’ve gotten,” Lavine said. “Bring in their financials, make them share and say why they can’t make it here but could somewhere else.” After all, Lavine said, “when they’re making these decisions internally, they have the numbers, they should share them.”
Initially, Sen. Charles Schwertner, a Republican from Georgetown and chair of the Business and Commerce Committee that held the hearing where Lavine testified, rewrote HB 5 to include near-100% abatements, with no kickbacks to school districts. In an exchange with Sen. Kolkhorst, Lavine recommended reducing the length of the abatement or cutting the percentage. “In many cases, they’re going to come anyway,” he said, “and when it really is the determining factor, we know from the past that it’s been too rich, because they didn’t keep it all, they kicked back [a percentage] to the schools.” Lavine also said he supported Schwertner’s decision to eliminate kickbacks, which the House and industry groups had sought to preserve. Kolkhorst agreed and said she favored a maximum 50% abatement with no kickbacks.
“You’re going to pay something for our schools,” she said, “anyone coming here … should want to help educate our future workforce.” Johnson also agreed about the need to put Texans first: “Tax dollars we give away come from people,” he said. “Let’s make sure we’re not throwing money away.”
Kolkhorst voted against the bill, but her recommendation of a 50% cap regardless of project size stuck, with a carveout for projects in disaster-affected “opportunity zones,” where companies can max out at 75% — a small victory for Lavine in a very long campaign.
Johnson also managed to tack on an amendment with stricter language about the “but for” test. While the old program and most of the House and Senate edits of HB 5 required only that an abatement be “a determining factor” in a company’s decision to locate in Texas — one among an undefined number of factors — the new program will require applicants to demonstrate that a proposed abatement is “a compelling factor in a competitive site selection … and that, in the absence of the agreement, the applicant would not make the proposed investment in the state.”
Johnson’s amendment also requires the comptroller to “consider factors related to the selection of the proposed site for the project, including the workforce, the regulatory environment, infrastructure, transportation, market conditions, investment alternatives, and any specific incentive information provided by the applicant related to other potential sites.” In an interview, Johnson said he was confident the more restrictive language would help screen out projects that would come to Texas without an incentive. Additionally, he said, “the more specific standard will allow the public to meaningfully scrutinize the comptroller’s decisions.”
These are major wins — but the changes are only as good as their enforcement.
When applications for the new program begin rolling in next year, it will be up to the comptroller, Glenn Hegar, to implement the stricter “compelling factor” language in the certification process. Hegar’s history of lax application of the “but for” test under Chapter 313 does not inspire much confidence among activists. His office did not respond to a request for comment, but it did include a remark about Johnson’s amendment in a fiscal note about HB 5: “It is the opinion of this office that the adopted Senate floor amendment with ‘compelling factor’ site selection language would not result in a reduction in the number of applicants.”
“You know how it’s going to end up — the apparent futility of what you’re doing — but you do your best anyway,” Lavine said.
“A member once stopped me in the hall to ask whether I minded being Cassandra,” he added. “I reminded him that Cassandra was right.”
