New law gives Texas aerospace industry a tax break. Will it affect property tax relief?
Starting this year, aerospace companies that call Texas home may see extra savings due to a new state law that is expected to save manufacturers roughly $64 million over the next five years, and in turn, bring more revenue to the state. But will it be at the expense of homeowners’ property tax relief?
The law allows aerospace companies working on certain federal defense contracts to factor in more exemptions when calculating their franchise tax bill — Texas’ main tax on businesses.
To calculate what they owe under the tax going forward, aerospace companies in Texas working on certain federal projects will be permitted to deduct from their total revenue both the costs of compensating employees for providing services and the costs of acquiring or producing goods. Typically, companies can only deduct one of the two, but not both.
Passed in May, House Bill 1670 went into effect Wednesday, and was authored by a handful of lawmakers, including Tarrant County Reps. Craig Goldman, R-Forth Worth, Charlie Geren, R-Fort Worth and Chris Turner, D-Grand Prairie.
Proponents of the law stress it will bring Texas on par with other states under the Federal Acquisition Regulations System — the system used by the U.S. government to acquire goods and services — and ensure it maintains a competitive edge to attract and maintain jobs.
North Texas in particular is a hub of the industry. It’s where nearly seven in 10 aerospace jobs in the state are located, according to a 2017 report, and Lockheed Martin is one of the largest employers in Fort Worth, where F-35 fighter jets are assembled.
“Not only do they manufacture a very sophisticated jet, but they have to service it in perpetuity for decades,” Tony Bennett, the president of the Texas Association of Manufacturers said, noting it was a unique aspect of these contracts. “And those were the expenses that the Texas franchise tax ... did not allow federal contractors under the Federal Acquisition Regulation to expense.”
The savings will be phased in by 20% over the course of five years, and by 2024, companies can deduct 100% of eligible costs.
A fiscal note analyzing the bill’s impact estimates that will translate to a nearly $64 million loss to the state’s Property Tax Relief Fund over the next five years — with $21.3 million expected to be lost in 2024 alone.
The Property Tax Relief Fund is used to reduce local school district property tax rates. And revenue from it is funneled into the state’s Foundation School Program, which is used to distribute state aid to school districts, in part, to help ensure equity in funding for districts receiving less at the local level due to lower property values.
“So what they’re doing is trading off a small part of the investment that was promised with HB 3, in order to get a special break for a industry that’s already very well established in Texas,” said Dick Lavine, a senior fiscal analyst for the left-leaning Center for Public Policy Priorities, a think tank based in Austin.
House Bill 3 is the sweeping school finance bill lawmakers passed in May that allocates about $6.5 billion more toward public education and $5.1 billion to cut school district taxes. But because of increasing property values, many Tarrant County homeowners did not see a large reduction in their school tax bill.
While the ranking can fluctuate, Texas is recognized as one of the top states for its attractiveness for aerospace manufacturing. In the consulting firm PricewaterhouseCoopers’ annual industry ranking, Texas was ranked 12th in the U.S. when weighing various factors like labor, industry and more. In years past, Texas has sat at the second and eighth spot. In tax policy, Texas nabbed the No. 1 spot in the U.S. on PwC’s 2019 ranking.
“It’s healthy, but it can be a lot more healthy if we make sure that we’re at least on equal footing with the rest of the nation,” Bennett said of Texas’ aerospace industry.
A report commissioned by the Texas Association of Manufacturers, which advocated for the bill, estimates that the law will result in an additional 19,493 jobs, generate $4.1 billion annually in additional economic activity and bring in roughly $76.1 million in state tax revenue annually.
The North Texas Commission, a public-private partnership that works to bolster the North Texas region, supported the bill, and the group’s president and CEO, Chris Wallace, stressed the law will be a “job creator.”
“It’s going to be more overall economic activity for those manufacturers, so then they’re going to pay more taxes. They’re going to hire more people,” Wallace said. “This is basically investing dollars so we can have more economic activity in our state.”
Lavine said that predictions that the state will be better off as a whole due to tax breaks are “speculative.”
“The aerospace industry, like every other business in Texas, benefits from a good public education system and other good public infrastructure. And they should be paying their fair share to keep it going,” Lavine said. “The franchise tax is not a major cost of doing business in Texas.”
Rebecca Young Montgomery, the Fort Worth Chamber of Commerce’s senior vice president of advocacy, said the law will benefit aerospace manufacturers like Bell and Lockheed Martin, who are members of the Chamber. The Chamber supported the bill.
“This is not a carve out,” Montgomery said. “This is putting us back on par where we were over 10 years ago in regards to the franchise tax and the federal government.”
A new mechanism for calculating the state’s franchise tax was established in 2006, to increase the amount of revenue collected by the state. The change was intended to supplement lost revenue after the legislature overhauled the school finance system following the Texas Supreme Court’s ruling that the state’s system at the time was unconstitutional.
“A lot of sectors have been trying to recover from that law, because it disallowed a lot of typical expenses,” Bennett said of the altered franchise tax system.
Lavine said that although lawmakers put more money toward funding schools and lowering property taxes through House Bill 3, it remains to be seen how the state will continue to find funding in the future.
“Clearly, the priority should be making sure that they can fulfill their promises before they start handing out any more tax breaks,” Lavine said.
Wallace said questions of sustainability arise every session, and that education is also essential to building a pipeline for an educated workforce.
“We have to keep our eye on the ball there that education is going to be first and foremost,” Wallace said. “How we pay for it? That’s the magic question.”
