News and Insights

Ryan & Company Tax Incentives Practice Manager, Karin Richmond Provides Testimony on Incentives to the Texas House Ways and Means Committee

Tax Development Aug 29, 2000

On August 28, 2000, the Texas House Ways and Means Committee held its final hearing on the Interim Charges placed before it by House Speaker Pete Laney. One of the specific charges to the Committee was to: "Review the tax exemptions and credits approved by the 76th Legislature...". Karin Richmond, National Director of the Tax Incentive Practice, provided these remarks for the Committee's consideration.

After eighteen years of observing and participating in the field of incentives, exemptions, refunds and credits, we would like to put forth a few of our most recent observations for the Committee's consideration.

1. In reference to the Texas Enterprise Zone Program, the State's primary vehicle for tax incentives to businesses expanding or locating in Texas, we recommend an increase of the State Sales and Use Tax refund to enterprise projects for job creation and retention from $2,000 per job to $5,000 and commensurately, decreasing the job cap from 625 to 250. A study completed last year by the Enterprise zone Program staff at the Texas Department of Economic Development (TDED) determined that the average number of jobs created or retained was 218, the median number was 100. While there have been a few businesses to participate with large numbers of employees, the vast majority of businesses have provided substantially less than 625 new jobs. By decreasing the number of total jobs available to a company for refund, and maintaining the current cap, the Legislature would accomplish two things at once. By maintaining the same cap, the State does not increase the fiscal note associated with this program. Secondly, this recommendation will provide the participating business a higher financial incentive to identify, hire, train and retain persons from a core element of the welfare-to-work target population. The Enterprise Zone Act defines that target group as "economically disadvantaged" in the Texas Enterprise Zone Act (Act), Chapter 2303, Texas Government Code, § 2303.402 (c). Texas has done a fine job in reducing its welfare rolls by bringing them across the poverty line and into viable employment. However, there is much work still to be done. And those that remain unemployed in this unprecedented time of growth have even more serious burdens to overcome the welfare vortex. They may need more training, they may need more management attention, or they may need more costly support (i.e. daycare facilities). Because our labor pool demographics have begun to change as a result of the rising tide in our Texas economy, we must consider ways to target this new "harder-to-hire" pool. To find and then begin to train the "harder-to-hire" pool will prove even more challenging. Increasing the dollar value of recruiting and training these individuals, by virtue of increasing the financial incentives, can help bring into balance the fiscal demands of finding and hiring the targeted employees with the actual business increased costs of participating with the Enterprise Zone Program and at the same time, keeping the cost of the incentives at the same level to the State.

2. Again, in reference to the Texas Enterprise Zone Program and the Defense Readjustment Zone Act, we recommend Texas Government Code 2303 and 2310 respectively, as well as the State Sales and Use Tax Code Sections 151.429 and 151.4291 respectively, include contract performance provisions which would apply to enterprise projects and defense re-adjustment projects. In the 76th Session, the Legislature passed a requirement that a business commit to meet a minimum threshold of 30 points of a possible 100 points to be eligible to apply for an enterprise project. In the final quarterly rounds, the application scores become truly competitive if the number of applications exceed the number of projects TDED may designate. The point structure is based on a redevelopment performance strategy collaborated by the community and the business participants. Some examples include an estimate of new jobs created or retained, an amount of financial investment dedicated to the new or expanded facility, or a contribution to public housing or contributing to the local Boy Scout Troop for a special targeted activity. This collaboration results in a certain score measured by the staff professionals. Today, the State does not have any authority to monitor or to withhold financial incentives should those commitments be unmet during the time the business is designated an enterprise or defense project. So, in theory, a business could "promise the sky" and get enough points to qualify for Texas tax incentives, yet deliver only a shadow if its former promises. By creating a strong link between what a business promises to do and what it actually does, the Program maintains its true incentive nature. That is, the State Enterprise and Defense Readjustment Zone Programs only provide incentives when a business does something in the community that it would not have otherwise done without the "carrot". We firmly believe that this component of incentive zones differentiates the tax expenditure from a "reward" to a real "incentive".

3. Economically distressed areas are integral to a number of tax incentive programs. One of the common statistical constructs used in defining such geographic areas is the level of poverty as determined by the decentennial census. In the wake of our recent economic surge, it may be expected that many areas now declared distressed will no longer meet the poverty criterion. Some zones may become smaller, more densely surrounding the worst impoverished areas. Some downtowns once ravaged by social ills may not even qualify if, for example, "dot comer" gentrification has taken a strong hold on re-development. Some zones may disappear altogether along with their ability to offer the requisite incentives to businesses. Should the distress criteria be loosened to compensate for the rising tide Texas is experiencing? We think not. The programs are designed to target our worst neighborhoods and distressed communities. We respectively suggest that the Committee reaffirm the standard by maintaining the current measures of economic distress.

4. We recommend the Sales & Use Tax Code include language that a receipt from a service performed by an enterprise project in a zone is not a receipt from business done in this state. This incentive is available, pursuant to Chapter 151. Limited Sales, Excise, and Use Tax § 151.4291. Tax Refunds for Defense Readjustment Projects, right now to Defense Readjustment Zone businesses designated by TDED. Specifically, we recommend Chapter 151. Limited Sales, Excise, and Use Tax § 151.429. Tax Refunds for Enterprise Projects, be amended to read, (i) Notwithstanding Section 171.103 or 171.1032, a receipt from a service performed by an enterprise project in an enterprise zone is not a receipt from business done in this state. This recommendation could make a positive difference in the tax liability of businesses performing in an enterprise zone and ultimately be an incentive for business expansions and recruitments in these distressed communities.

5. We recommend increasing the tax refund for employers of AFDC/TANF clients offered by the State of up to $2,000 per employee to $4,000 per employee hired in an enterprise zone, federal empowerment zone, or enterprise community. Therefore, those individuals would become "economically disadvantaged employees" as defined by the Enterprise Zone Act and can add to the incentives that an enterprise project may request or for any other business located in one of the aforementioned zones, the incentive may be doubled to offset the increased costs generally associated with conducting business in an economically depressed area. Historically, many employers have not taken advantage of this refund. This could be due to the lack of awareness by the employers of Texas in general and this program specifically. However, since this incentive takes into account a variety of taxes, not only sales and use and franchise taxes, it may represent tax refund opportunities for the employer that cannot be realized because other refunds or credits have been absorbed through other incentive programs.

For more information, please contact Mr. G. Brint Ryan, Managing Principal of Ryan & Company, at 972.934.0022. Mr. Ryan can also be reached via e-mail.