How Some South Texas Communities Structure Incentives to Compete for Major Investment

Across South Texas, communities are working to attract large-scale industrial investment in an increasingly competitive environment. Major projects from advanced manufacturing to energy and infrastructure can bring long-term economic growth, but they also require substantial upfront capital. To remain competitive, many local governments are using a combination of incentive tools designed to balance near-term considerations with long-term public benefit.

One of the most widely used tools is the property tax abatement authorized under Chapter 312 of the Texas Tax Code. These agreements allow cities and counties to temporarily reduce the taxable value of new investment, helping offset early project costs. In return, companies commit to building facilities, creating jobs, and contributing to the local economy. While abatements reduce tax collections in the early years, they are structured to expand the tax base significantly once agreements expire. While allowed by law, it is rare to see a community provide a 100% abatement to a project for the full legal 10-year term.

In many cases, Chapter 312 abatements are paired with Payment in Lieu of Taxes (PILOT) agreements. Rather than eliminating tax contributions during the abatement period, PILOTs establish a negotiated stream of payments, which provides local jurisdictions with predictable near-term revenue. This approach allows communities to remain competitive while still capturing value during the early phases of a project. The revenue received under the PILOT arrangement is less restricted to how it’s spent, giving the community at hand the opportunity to put these funds toward priority needs of the community such as hospitals and roads.

School districts, often the largest beneficiaries of property tax growth, also play a central role. Through the Jobs, Energy, Technology, and Innovation (JETI) Act, districts can offer a partial limitation on a project’s taxable value for maintenance and operations (M&O) purposes during the initial years of investment. At the same time, the project remains fully taxable for interest and sinking (I&S) debt service.

This structure is particularly important for long-term planning, as I&S tax revenue is not reduced. Therefore, school districts can see immediate increases in bond capacity to support capital needs, such as new facilities and infrastructure. Even with a temporary limitation on M&O value―often around 50% during the first decade―districts still receive new operating revenue that would not exist without investment.

Recent activity in South Texas offers a useful example of how this approach is being applied. Local officials there have supported major industrial investment through a combination of Chapter 312 abatements and complementary agreements, helping secure projects that might otherwise have been located in competing regions along the Gulf Coast. By structuring incentives to include near-term revenue through PILOT-style payments and long-term tax base growth, South Texas has distinguished itself as an area that is willing to compete while maintaining a disciplined, performance-based approach.

Together, these tools reflect a broader strategy: sharing risk in the early years while positioning communities for long-term gain. Large-scale projects often generate economic activity beyond property taxes, including construction jobs, permanent employment, and increased demand for local goods and services. Over time, as abatements phase out and projects reach full taxable value, the fiscal impact on local governments and school districts can be substantial.

It’s important to note that the abatement process in Texas is deliberate and can take three to four months from initial discussions to a finalized agreement. The process generally begins with outreach to the taxing jurisdiction, such as a city or county, to gauge interest. If there is alignment, a formal abatement application is submitted, followed by public discussions and consideration by local officials. A required step in this process is the creation of a Reinvestment Zone. Despite the name, this designation does not change zoning, land use, or entitlements for the property. Instead, it is a statutory mechanism that designates an area as eligible for tax abatement under Chapter 312. Only new investment within the Reinvestment Zone and specifically outlined in the agreement qualifies for the abatement. This step ensures transparency and provides a defined framework for evaluating and approving incentive agreements.

These programs are not without debate, and they are most effective when applied with transparency and careful evaluation. Local leaders must weigh each opportunity based on projected returns, community priorities, and long-term sustainability.

As South Texas continues to compete for investment, the focus is not simply on offering incentives but on structuring them responsibly. When designed thoughtfully, tools like Chapter 312 abatements with a PILOT arrangement and JETI agreements can help communities attract transformative projects while strengthening the tax base and supporting public institutions over time. Our specialists here at Ryan can assist companies looking to expand in Texas by proposing responsible incentives to local jurisdictions.

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals.