Project Double

Kevin Kuntz, senior vice president of global logistics for Gap Inc., speaks during a news conference in February announcing the construction of an e-commerce fulfillment and distribution center in Longview.

A proposed bill in the Texas House could “decimate” city and county budgets across the state and is threatening economic development projects, according to area officials.

House Bill 4072 would change how online sales taxes are paid — the city in which an item is delivered would receive the revenue instead of the city where the item is made and shipped. It’s a matter of sales tax being paid to destination cities instead of cities from which products originate.

That means a loss of millions of dollars of revenue annually for Gregg County and its cities and schools as sales tax funds instead would be distributed to other cities in Texas and the U.S. from products made and shipped from Gregg County.

For economic development projects, which leverage sales tax revenues when making agreements to lure industries to a community, it could put the brakes on such work.

As the bill continues to be considered by the Texas House, Longview Mayor Andy Mack along with state Rep. Jay Dean, Gregg County Judge Bill Stoudt and Longview Economic Development Corp. President and CEO Wayne Mansfield have been vocal in their opposition to the measure and have been actively engaged in fighting against its passage .

Not only does the bill potentially impact the planned Gap Inc. distribution center in Longview, it also would affect many other projects in Longview and surrounding East Texas such as the Target Distribution Center in Lindale.

The impact comes from Texas cities and counties leveraging sales tax revenue when luring industries to the community as part of economic development efforts.

Chapter 380

Texas cities use what are referred to as Chapter 380 agreements to offer incentives designed to promote economic development, such as commercial and retail projects. Chapter 380 of the local government code allows cities to offer loans and grants of city funds or services at little or no cost in order to promote economic development. Texas counties use Chapter 381 agreements in the same way.

So when the city of Longview, LEDCO, Gregg County and Longview ISD came together to help bring a planned $140 million Gap Inc. e-commerce distribution center here, they offered the company a variety of incentives.

LEDCO agreed to a forgivable promissory note of $11.42 million for the purchase and sale of 142 acres in the North Longview Business Park, with forgiveness based on completion from Gap Inc. of an investment and employment goals. LEDCO also agreed to pay to relocate utility lines on the property. The city and Gregg County each agreed to 25-year tax abatements on the property and agreed to reimburse Gap Inc. for up to 40 percent of local sales tax revenues associated with sales from the fulfillment center for a 25-year period.

The payoff, Mansfield said, was that the magnitude of the sales tax revenue generated by sales from Gap Inc. would be so great that it would pay back the community’s investment in the project within five years with a projected rate of return on investment of 29 percent. County officials said Gregg County would see $27 million in revenues over the course of its 25-year agreement with Gap Inc.

However, HB 4072 seeks to change that. As more consumers shop online and more products are shipped across the state and nation, the legislation proposes that sales tax should be paid to the city of a product’s “destination” rather than the city of a product’s “origin.”

“For Gregg County, it will mean a loss of $1 million in sales tax revenue annually just from the Gap deal alone,” Stoudt said. The county stands to lose more sales tax revenue from other entities as well. It will likely be millions lost when taking into account other businesses, he added.

“This bill was poorly thought out. It was poorly vetted. It was poorly written, and it will have the biggest impact on people in business in rural areas of Texas,” Stoudt said.

Comptroller

The bill is sponsored by state Reps. Morgan Meyer, R-Dallas, Dustin Burrows, R-Lubbock, and William Metcalf, R-Conroe. However, the real source of the legislation is Texas Comptroller Glenn Hegar.

Dean, R-Longview, said the bill came into the Legislature late during this session. But Hegar, who has taken issue with Chapter 380 and Chapter 381 agreements as e-commerce business has grown in popularity, held a hearing during an interim year without notifying many of the state’s representatives, including Dean.

The Legislature meets every two years, last meeting in 2019. In spring 2020 — when the COVID-19 pandemic was new in Texas — Hegar held a hearing “unbeknownst to any of us,” Dean said.

There wasn’t any opposition at that hearing, Dean explained, as he again noted that the hearing was held during an interim year, without notification to state lawmakers and when the COVID-19 pandemic was at a high in Texas.

“According to the chairman of the Ways and Means Committee, (Hegar) wanted this bill to help codify the ruling he made during that interim hearing,” Dean said.

Meyer, who sponsored the bill, serves as chair of the state’s Ways and Means Committee, which, among other things, has jurisdiction over all proposals related to raising state revenue, levying state taxes and fees, permitting local governments to levy or impose property tax, sales and use tax and other fees, and all proposals to regulate the manner of collection of local government revenues and taxes.

Dean said not only does the bill cover Hegar’s ruling, but it actually goes further than that. Dean noted that Hegar perhaps “overshot what his authority is on dealing with these types of agreements.”

“We negotiated with Gap utilizing the tools that we had, and these (Chapter 380/381) agreements have been in place since the late 1980s. Our issue is that in Longview, we negotiated with Gap in fairness based on what the statutes are from the state regarding the tools that we can use to recruit industries and businesses to our community,” Dean said. “Now all of a sudden this bill pops up very late in the session. They want to change the rules of the game at a point in time when we — from a fairness perspective — utilized in good faith the tools we were given by the state to recruit and attract business. To change the rule with this bill, it not only potentially impacts our Gap deal, it has terrible issues for communities all over the state of Texas.”

Mansfield noted the bill won’t just impact the Gap Inc. project. Many small businesses have worked in the last year to grow their online, e-commerce business, and as they continue to ship items to other cities and states, they would have to funnel the sales tax to them as well.

“The logistics to small businesses that have managed to stay alive because they had an online business will be burdensome and costly,” he noted.

Mansfield, Stoudt and Mack each questioned the benefit of the bill to Texas when it could send money outside of the state, and each said the bill seems intended to benefit larger metropolitan cities by boosting their sales tax coffers instead of rural communities.

Beyond that, however, Texas could be sending money to Louisiana, Oklahoma or almost anywhere else in the U.S.

Cities primarily generate revenue in four ways: through property taxes, sales tax, fees and via municipal court. In 2019, Abbott signed legislation that requires voter approval before local governments can increase their property tax revenue by more than 3.5 percent. That effectively capped property tax rates in Texas for government entities.

Now, sales tax revenue is at stake.

“Hegar doesn’t like 380/381 agreements, but it’s not his right to dictate to communities how we use our economic development tools that were given to us by the state to attract business,” Stoudt said.

‘Primary focus’

Mansfield testified before the state’s Ways and Means Committee on the bill, while Stoudt and Mack have been in contact with officials in Austin. Meanwhile, Dean is making sure the concerns of East Texans are heard at the state Capitol.

“My focus and my staff’s focus for the last four weeks has been on trying to make sure this potential bill does not interfere with our Gap contract,” Dean said. “I feel good about that. ... This is my primary focus right now.”

His suggestion to the Ways and Means Committee, he said, “is that we need to take a step back.”

“We need to look at either grandfathering in the Chapter 380 and 381 agreements that are in place and/or we need to come back during the interim and find a new way to address the issues that the comptroller has with them, then come back in 2023 with a new proposal,” Dean said.

The bill could threaten not only existing but future economic development projects in Texas, and Dean noted that other states, such as Louisiana, would love to have some of the projects that Longview has planned.

“I am doing everything in my power to make sure this doesn’t put our Gap center in jeopardy,” Dean said. “Just as I did when I worked with the community to bring a vaccine hub to Longview, I am using every relationship I have to make sure this doesn’t happen.”

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