‘Borderline fraud’: Texas lawmakers look to close major tax loophole (2025)

The Texas Legislature is considering closing loopholes in a tax incentive program that lets cities and counties give public funds to private businesses with no limits and little oversight.

Other types of economic development incentives in Texas, such as abatements on city, county and school property taxes, cap each deal at 10 years. Those programs also come with other guardrails and transparency measures.

Chapters 380 (for cities) and 381 (for counties), by contrast, let city and county officials reduce any type of tax or fee that companies pay — or simply give away public money to companies as grants.

A 2021 Houston Chronicle investigation found the state statutes impose no limits on each deal and do not require officials to write rules guiding their programs, hold public meetings before the deals are approved or reclaim funds paid to companies that fail to meet their commitments.

A bill filed by state Sen. Brian Birdwell, R-Granbury, would address some of these weaknesses. Senate Bill 878 passed the Senate 27-4 this month and awaits a hearing in the House Ways & Means Committee.

The bill would force cities and counties to hold public hearings on each deal before putting it to a vote of the commissioners court or city council, post information about the deals on their websites and include “appropriate performance metrics” in each agreement.

It would cap the deals at 25 years – 10 years plus up to three 5-year renewals, which could be approved only if the deal’s performance metrics are met.

The bill also would block cities and counties from using the laws to reduce businesses’ property taxes, limiting those abatements to other chapters of state law that cap those deals at 10 years.

The one exception to that ban is that development zones could use their revenues – property taxes, mostly – to enter into agreements under Chapters 380 and 381.

These incentive programs should be more transparent and should not be a “workaround” for other economic development laws, Birdwell said at a March 17 committee hearing.

He cited the 2021 Chronicle investigation’s finding that 130 of the 900 agreements reporters reviewed from Texas’ largest 15 cities and counties exceeded the 10-year cap that applies to property tax abatements – even though many of those deals also rebated property taxes.

Many communities are not abusing the laws right now, Birdwell said, but the laws do not prevent it. The bill makes the programs “more precise,” he said, ensuring transparency and a rationale timeframe for review.

"How many of the members of the committee want to go back to their constituents and say, ‘Hey, we're working on cutting your property taxes, but we're going to give a 50-year tax exemption under 380 or 381 to this business that comes in’?” Birdwell said in an interview. “Of course, the answer is: Nobody."

Nathan Jensen, a University of Texas at Austin professor who studies tax incentives in Texas, said the bill is an improvement but should also add requirements related to jobs created, wages paid or capital invested. Academic research also suggests that even a 10-year term for incentives might be overkill, making 25 years a “wild number,” he said.

The bill “sets a floor on standards, but communities can go higher. The fact that many communities don’t have any standards is pretty shocking,” Jensen said. “If this triggers communities to be more serious about it, that would be a positive outcome.”

Greg LeRoy, executive directive of Good Jobs First, a Washington, D.C.-based nonprofit that scrutinizes economic development programs, echoed that.

“I’m glad to hear about the performance metrics,” he said. “I’m not quite sure what ‘appropriate’ means. I hope there’s a little more specifics nailed down on that.”

Birdwell said he wants to “give the cities and the counties the opportunity to solve this problem.”

“I don't want to be so prescriptive that I tell them what their metrics are,” he said. “But I specify that you shall have metrics for success.”

‘The secret sauce’

Local officials have praised Chapter 380 and 381 as flexible tools for spurring economic development, including not only big-ticket subsidies but small-scale improvements not suited for more standard 10-year tax abatements.

Indeed, the 2021 Chronicle investigation found some cities granted a few thousand dollars, on average, to help local businesses after the COVID-19 lockdowns, or to reimburse homeowners a portion of their minor home repair projects in select neighborhoods.

But the investigation also found no shortage of blockbuster deals – 40-year incentives to resorts and corporate headquarters; 100% property tax rebates for decades; a $50 million grant to an entertainment venue. And that 106-year deal, which has particularly irked Birdwell.

“The problem with a 100- year sales tax abatement is there are people that will be born and will die having lived a long life without any review and analysis of the efficacy of that agreement,” Birdwell said.

State Sen. Paul Bettencourt, R-Houston, also referenced that deal in calling for the programs’ “excesses” to be stopped.

“They are travesties of a waste of taxpayer monies, and borderline fraud by bad actors in these industries as some tax shelters could last up to 100 years,” he said.

Stewart McGregor, of the Texas Economic Development Council and the Kaufman County Economic Development Corp., testified at the Senate hearing that Chapters 380 and 381 are “the secret sauce to the Texas miracle.” He said the bill’s time limits “put some handcuffs on our abilities to attract industries and meet their unique needs.”

Kris Collins of the Greater Waco Chamber of Commerce testified that, of the dozens of major projects announced in her area since 2020, the vast majority involved Chapter 380 or 381 incentives.

“Understanding the needs of the companies and developing creative solutions has been key to what Chapter 380 and 381 has allowed us to do,” Collins said. “Right now we’re well-armed. But the proposed changes to this program are akin to sending us into battle with butter knives.”

Asked by state Sen. Charles Schwertner, R-Georgetown, if she would put a 100-year deal in front of her local elected officials for approval, Collins said, “If I felt it provided a strong return on investment and great benefit to our citizens, I wouldn’t hesitate.”

That 16 people registered their opposition to the bill at the hearing but only two spoke, Birdwell said, “tells you they don't really want to be asked about why they like this, because it is so loosey-goosey."

4,000 deals

Birdwell filed a similar bill during the Legislature’s last session in 2023, which also easily passed the Senate and died awaiting a hearing in the House Ways & Means Committee.

The chairman of that committee in 2023 and this year, state Rep. Morgan Meyer, R-Dallas, could not be reached for comment. Nor could the committee’s vice chair, state Rep. Trey Martinez Fischer, D-San Antonio, who last session authored a companion bill to Birdwell’s Chapter 380-381 bill.

Meyer, in 2021, authored a bill to force local officials to report their Chapter 380-381 agreements to the state comptroller’s office for posting in an online database. It became law, and the directory launched in August 2021. A 2023 bill forced cities and counties to start reporting more information, including the deals’ projected cost.

The database – which also includes 10-year property tax abatements approved under a different chapter in state law – lists more than 4,000 local incentive deals across 350 communities.

About 1,100 of the agreements exceed 10 years in length. Two dozen exceed 40 years in length. Of the agreements for which an estimated dollar amount is listed – about a quarter of the database – two dozen deals top $50 million.

The most frequent users of the program are San Antonio, at 235 deals, and Richardson, with 188. The only other cities with more than 100 deals are Sugar Land and Plano.

Harris County officials registered their opposition to the bill but declined to comment further. The county has six Chapter 381 agreements, mostly small-dollar, one-year deals with local economic development groups. Houston, which has 18 active Chapter 380 deals, does not oppose the bill.

“I'm not confident of where we'll end up. But we still have plenty of time left,” Birdwell said of the bill’s prospects. “We're going to work it because I think it's the right policy.”