The House Committee on International Relations & Economic Development met on April 20th to hear invited testimony on interim charges covering economic development incentives, semiconductor investment, and trade with Russia.

This report is intended to give you an overview and highlight of the discussions on the various topics taken up. It is not a verbatim transcript of the discussions but is based upon what was audible or understandable to the observer and the desire to get details out as quickly as possible with few errors or omissions.

 

Opening Comments

  • Chair Angie Chen Button – Will be examining economic incentives, taking a close look at semiconductor industry, and looking at investment and trade with Russia
  • Button – Many very concerned about the situation in Ukraine, need to take serious look at impact of trade with Russia, how it affects Texas’ economy, and sanctions; want to make sure we’re doing the right thing to minimize damage and maximize impact

 

Trade with Russia

Ray Perryman, The Perryman Group

  • There are times when humanitarian concerns and geopolitical concerns necessitate sanctions
  • Everyone will be affected by supply chain issues, wheat production disruption in Ukraine will affect everyone
  • Texas is not terribly dependent on Russia economically, imported about $5 billion and exported about $600 million, very small portion of trade
  • 90% of imports come from two places, oil & refined products imported from Russia
  • Refineries are moving towards Texas crude anyways, oil coming out of Permian basin and Gulf of Mexico are some of the lowest carbon content
  • Can make the refined products in Texas, just a matter of getting capacity, investments have already started
  • 81k jobs impacted with no trade with Russia
  • Also investigated what would happen if we used only Texas oil & products, would only be twice import/export impact, not a huge issue
  • Texas is producing a lot of LNG, not enough to move scale in Europe currently, but Russia’s political power relies on control of LNG supplies
  • Pension funds had funds set out when baby boomers were part of the workforce, as baby boomers age have needed to go to more risky investments; prudent to have some international investments
  • If we were to divest from Russia, there are plenty of other securities and won’t affect long term investments at all
  • On imports & exports, not a single place were there aren’t more buyers and sellers; economic impact will be negligible
  • Button – Relieved to hear that impact will be minimal, hear constantly about impact on materials, etc.
    • Won’t have impact on supply chain issues, regardless of decisions on Russia, will have supply chain issues like grain, etc.

 

Federal Reserve Bank of Dallas

  • Providing a broad overview on the Texas economy
  • Difficult to plan economically, but projections are that Texas will continue to outperform the rest of the US; major issues would be supply chain, elevated inflation, etc., issues that are impacted by the Russia/Ukraine war
  • Presents chart on previous recessions, pandemic recession had very steep decline, but also very rapid recovery
  • During pandemic recession, household income increased due to federal stimulus
  • Recovery has been uneven, energy sector laid of a quarter of workers early on in the pandemic and haven’t yet been able to hire them all back
  • Wage growth in Texas is exceeding the rest of the nation, but still trailing inflation
  • Texas gets a lot of domestic migration from other states, accelerated during the pandemic
  • Recovery of Texas exports from the pandemic has been remarkable, far above pre-pandemic levels and rest of nation trails behind; a lot of this is energy related
  • Production growth early in the pandemic was coming from drilled but uncompleted wells, but now need production to increase enough to address demand
  • Highlights higher materials and import costs, Russia-supplied materials are available from elsewhere but will experience increases in prices
  • Firms are reporting that normalization will not be this year, will be 2023
  • 3% growth projection in 2022, growth has boosted migration and O&G prices
  • Button – Normalization of supply chain, will that be early next year, late next year?
    • Survey responses indicate early next year
    • Perryman – Russia/Ukraine and pandemic adds to uncertainty; personally betting more towards end of this year
    • When you create a problem, you also create the incentive to solve the problem; e.g. permit requests going up
    • Alternative to not increasing O&G production is economy not growing

 

Comptroller’s Office

  • Impact from loss of Russia trade will be minimal, impact on state revenue will be small; exception might be O&G taxes tied directly to production
  • Higher O&G taxes would mean more money will flow into ESF, increased O&G taxes is likely the largest impact, but increased activity in O&G industry could indirectly boost sales tax, hiring, salaries, etc.
  • Sanctions could lead to lower tax revenue due to effects on US economy

 

Mike Reissig, Texas Treasury Safekeeping Trust Company

  • Comptroller asked TTSTC to look at Russia investments in February, no direct investment in Russia as of December 2021
  • Identified $18.6m in indirect investments, have been working with managers to reduce and get out of these investments without costing state money and keep with liquidity provisions; after 6 weeks went down to $1.6m

 

Semiconductors

Joe Pasetti, SEMI

  • Provides overview of SEMI, largest trade association for semiconductor producers
  • Shortage has demonstrated fundamental role of semiconductors in various industries, auto industry still experiences temporary stoppages due to lack of supply
  • Production is being brought online, but semiconductor production is complex
  • Many countries provide incentives at multiple levels of government, will impact decisions on where semiconductors industry wants to locate production facilities
  • State level investments are needed for Texas to be competitive; also need stable workforce, water & power supplies, etc.
  • States are working to ensure their economies are competitive, companies must have received state or local incentives to apply for new federal program
  • Material and supply for semiconductor production is a $180b industry and Texas is well-positioned to attract this type of investment
  • Tools are also an important supply line, supply is constrained
  • Button – Competition for semiconductor business is at a global level, highlights TSMC, Samsung, and TI facilities in Texas; where is Texas globally compared to others?
    • Since the federal policies haven’t yet been implemented, US remains in a relatively poor position to attract this type of manufacturing
    • If the federal incentives are implemented, competitiveness of the US will improve significantly

 

Peter Esser, NXP Semiconductors, FABSS Coalition

  • Provides overview of NXP Semiconductors, designs and manufactures chips
  • FABSS Coalition incl. AMD, Applied Materials, Dell, GM, etc.; born out of severe winter storm last year that revealed major issues with Texas’ grid
  • FABSS coalition wants to cooperate with state & local leaders, other industries
  • Texas offers good business incentives, but continued challenges exist due to state’s electric grid and uncertain supply
  • Sunsetting of Chapter 313 is also concerning, lack of certain on a replacement could lead to companies proceeding more cautiously or looking at other states
  • Arizona has a commerce authority that serves to route industry concerns where needed
  • Federal government is absolutely supportive of incentives, broad bipartisan consensus that investment in semiconductor industry is needed
  • Texas should work with industry to create assured and efficient resource supply roadmaps, could support workforce supply more
  • Could also promote more efficient use of power & water to be more green, sustainability efforts would be a big boon to semiconductor industry
  • Other states are already working to capitalize on 2021 winter storm and drive business to their states; investments are not guaranteed to come to Texas without effort to solve issues
  • Button – Percentage of semiconductor fabrication has been shrinking in the US, other nations’ industries have been growing; what are the top 3 things we need to do to reverse the trend?
    • Pasetti, SEMI – Incentives and business environment needs to be competitive
    • Workforce support is needed, will see largescale retirements and need more skilled workers
  • Cecil Bell – Worked to pass a workforce training bill recently, semiconductor industry could partner with schools to create pipelines under existing law
    • Esser, NXP – Point is well taken, programs are being utilized, NXP engages in early outreach
  • Bell – Can incentivize students to know why these types of jobs of valuable, can teach students and allow them to move in various parts of the industry
  • Button – Agrees, goes back to lack of STEM emphasis in higher education

 

Economic Development Incentives

Angelos Angelou, AngelouEconomics

  • Provides overview of AngelouEconomics, works with a variety of industry, helped found an economic accelerator involved in Texas
  • Kudos to Texas for preserving a very pro-business climate
  • Expiration of Chapter 313 at the end of the year will hurt
  • Regular office provides around $10k per employee in taxable value, semiconductor companies provide anywhere from $8-$10m in taxable value per employee, datacenter companies probably more than this
  • Semiconductors are among the most efficient users of energy and water, use large amounts of water but have stable rates of consumption
  • Any kind of incentive that could help put a ceiling on depreciation of residual value would be very helpful for the semiconductor and datacenter industries
  • Other incentive area could be for sales tax portions that are not already exempted; datacenters replenish equipment every 4-5 years regularly, continual investment takes place
  • Chapter 313 needs to be re-thought and perhaps reintroduced
  • Depreciation schedule ceiling on residual value could be in place across Texas
  • Sales tax incentive similar to that in place for crypto mining datacenters could be helpful, but it requires a building and this is not necessarily needed; not an issue for regular datacenters, but could incentivize more crypto industry
  • There is significant competition for talent in this industry, remote work is here to stay in high-tech sector, but no state policy promotes industries finding remote workers residing in Texas or elsewhere
  • Other states have incentives to attract remote workers like free lots to build housing, payments to support housing, etc.
  • As labor market tightens, important to allow as many workers to work remotely as possible, allowing nonresident remote workers to meet requirements could help high-tech industry
  • Some parts of the semiconductor industry aren’t considered manufacturing and pay a significant sales tax
  • A fund to assist higher education universities for STEM scholarships could be helpful, particularly in electrical engineering, chemical engineering, etc.
  • Cautions that rising gas prices affect all disposable income, higher oil prices lead to higher tax revenue, but hurt economy more broadly
  • Bell – You mentioned incentivizing people to work from home, creates some challenges in other industries if we drive people out of industries that need people physically present
    • Advocating for remote work in high-tech, not necessarily in other industries
  • Bell – Speaking more to people being incentivized to other industries, everything needs to be balanced
    • Agree that we shouldn’t create another problem, but larger tech companies would support remote work and would appreciate being able to meet requirements with remote workers

 

Adriana Cruz, Office of the Governor Economic Development & Tourism Office

  • Highlights organization and operations of the Eco Dev & Tourism Office
  • Seeing a trend in increased interest in Texas & also size of projects interested in Texas
  • Components of successful project are financial components, workforce, appropriate site, community amenities, and then incentives added on at the end; incentives become the dealbreaker and are very competitive
  • Texas works closely with local communities and eco dev corps to crate package of incentives
  • Highlights incentives in the Texas Film Commission, promotes Texas as premier production destination for film, animation, commercials, video games, etc.
  • Presents chart of highly utilized programs, most utilized programs incl. Texas Enterprise Fund, Events Trust Fund, Texas Enterprise Zone Program, Spaceport fund, Moving Image Industry Incentive
  • Many large projects are going to more rural communities
  • Texas Travel Industry Recovery Grant Program from SB 8 expected to launch this Summer, also the Texas Small Business Credit initiative
  • Other states are developing new tech industry incentives, TX has lost out on some large bids; other states are looking at how to surpass Texas
  • One of the targeted industries is high-tech manufacturing, semiconductor manufacturing is part of this
  • CHIPS Act is part of incentive package for semiconductor industries, part of Act incl. $15b for establishment of research facilities
  • Button – Asks after local and state incentives
    • Difficult for industries to determine locations due to competitive nature of incentives; Office works closely with local community, sends out RFI statewide
    • Other portion of this is that there are local components and state components for incentive packages
  • Button – Asks for opinion on Chapter 313; don’t want to get too into this as Ways & Means has charges on it and will be meeting soon
    • Chapter 313 is very important, no other tool looks at the capital investment side
    • Office is ready to work with legislature to find tools to ensure Texas remains competitive
    • Projects have indicated Chapter 313 is an important consideration in choosing Texas
  • Claudia Ordaz Perez – Wonderful tool for local communities, asks after timeline and streamlining
    • Trying to streamline this process, leadership offices have 30 days to review applications and can request 14 day extensions
    • Has been narrowed to 45 days; once we receive an application, Office takes two weeks to review project, company, community support, etc.
  • Button – Rep. Ordaz Perez passed a good micro loan program last session
  • Ordaz Perez – May be receiving some federal funding for this, was a good tool to help microbusinesses
  • Todd Hunter – Haven’t heard anyone speak on coastal companies like refineries and companies, 14 coastal counties services by Texas ports, second group of counties bordering these counties; many 313 agreements in this area & haven’t heard many comments from this industry; encourages members to reach out to this industry and area
  • Hunter – When we talk about 313s, we shouldn’t forget the coastal areas, would be helpful to have input from business and industry in this zone

 

Carlton Schwab, Texas Economic Development Council

  • Chapter 313 has been very good for economic development, many other states adopting a local option tax to support economic development in their states
  • Chapter 313 agreements support more than 10k jobs around the state; Chapter 313, 380, 381, etc. very important for landing high-value projects
  • Provides history of Chapter 313
  • Need to recreate something that looks a lot like Chapter 313 that perhaps reflects current times

 

Adrian Kennedy, Temple Economic Development Corporation

  • Economic development is driven at the local level, but large-scale projects want to see state engagement; state level incentive opportunity is critical to closing these agreements
  • Meta is going to construct is large datacenter project in Temple; economic benefits are expected to be large, community in Temple is changing due to availability of incentives
  • $400m of investment every 3 years to replace equipment for the Meta project, tax burden was a major consideration 7 Chapter 312, 380, 381 programs aided in easing the burden
  • Provides an overview of Chapter 312, 313, 380, 381, etc. tax abatement incentives
  • Bell County stands to receive $1.2b in new revenue/year, Temple local ISD has issued a bond in anticipation of this new project due to reduced tax burden expected

 

Kent sharp, Sherman Economic Development Corporation

  • In 2021, had $17b Samsung in Taylor and $30b in Sherman; Sherman and Taylor used the 4 economic incentive programs to attract these programs
  • Chapter 313 was the most important component for the Sherman project, wouldn’t have been available without this even with maximizing city and county portion
  • Sherman still behind Ohio on a 30-year cost comparison, Sherman has shortened this recently and expecting an answer
  • Ohio recently passed a large-scale tax abatement program and charges no property tax on certain equipment; even with the Chapter 312, 313, 380, and 381, still behind the curve
  • Losing Intel factory to Ohio was a major detriment to Texas
  • Legislature must replace 313 with a stronger bill if we’re to compete with other states for larger projects
  • Button – Comments that school tax abatement is harmless to schools because the state replaces the funds

 

Greg Sims, Greenville Economic Development

  • Presents written testimony highlighting HP Hood company project; Greenville had to compete with hundreds of cities in multiple states
  • Project was 400m, huge benefit to Greenville community, project won the Governor’s Award
  • Much of the tax burden is at the school district, capped revenue but didn’t cap values so bills still rose; better tool would be to cap values at 3%/year regardless of valuation
  • $7b or $8b goes to debt service payment for school districts, Chapter 313 agreement and value led to $500m impact on these debt service payments
  • Need to reauthorize Chapter 312, could be a platform to get to another style of 313

 

Ian Vasey, Corpus Christi Regional economic Development Corporation

  • Appreciates Rep. Hunter’s comments on refineries, etc.
  • Highlights written testimony showing incentives benefits to counties, cities, and ISDs in the Corpus Christi region
  • Without Chapter 313, a $10m investment project wouldn’t be in the Corpus Christi community
  • $53b of incentives in the area, working on pursuing 20 more active projects at $24b value
  • In Nueces County, school portion of tax bill is 65%, San Patricio it is 69%; Chapter 313s are very important, tax burden is growing mostly at ISD level
  • Other states are putting more incentives in place and advertising the expiry of 313s
  • Want to make sure there is new workforce training in manufacturing tech
  • Want to track and report on jobs created, someone at the state should be seeing & checking these metrics
  • Should have a sign or other advertisement for the partnership between ISDs and Texas
  • Should also allow large-scale energy projects with job requirements, etc.