Friday, May 24, 2024

Industrial tax break reforms strengthened Louisiana business climate, study finds

by BIZ Magazine

By Wes Muller, Louisiana Illuminator

A new analysis found that reforms to Louisiana’s popular industrial tax subsidy appear to have strengthened the state’s business climate. Advocates of the changes made six years ago say the results should allay fears that curtailing the incentive would kill jobs or drive investment out of town.   

The study, released Tuesday, focused on the state’s Industrial Tax Exemption Program (ITEP). The Institute for Energy Economics and Financial Analysis (IEEFA) — a think-tank that examines issues related to energy markets, trends and policies — performed the analysis on behalf of Together Louisiana. The umbrella network of over 250 local religious and civic advocacy groups lobbied heavily for ITEP reforms Gov. John Bel Edwards enacted via executive order in 2016.

The think-tank compiled publicly available tax data from 206 companies in Louisiana, including the top 100 ITEP recipients and the top two recipients in each parish. In aggregate, they account for 95% of the value of ITEP-exempted property from 2016 to 2020. 

Edwards’ ITEP reforms, which have effectively forced companies to pay more of what they owe in property taxes, added more than $16 billion worth of industrial property to local government tax rolls statewide from 2016 to 2021. In turn, that has generated new annual parish property tax revenue totaling $113 million for schools, $55 million for law enforcement and $115 million for public services such as roads, levees, drainage, parks and libraries, according to the report.  

IEEFA’s study also noted that not only have the reforms not hurt Louisiana’s business climate, they likely strengthened it. 

“ITEP reforms appear not to have had a negative impact on industrial capital investment statewide,” the report stated. “In fact, overall capital investment in ITEP-eligible industrial property has increased by 50% during the post-reform period [versus] the five years prior to reform.”

History of ITEP 

Administered under the Louisiana Economic Development (LED), ITEP is Louisiana’s flagship tax incentive for the manufacturing sector. For decades stretching back to 1936, industrial manufacturers, including some of the world’s largest oil and petrochemical companies, enjoyed 100% property tax exemptions in Louisiana for up to 10 years on capital investments such as new facilities and improvements to existing facilities. 

The stated goal of the program, according to LED, is to incentivize job creation. Proponents of ITEP, primarily business and industry lobbyists, have long argued that businesses will relocate to areas that offer lower taxes or credits and exemptions that reduce their tax burden, allowing them to hire more people. 

The program drew public criticism particularly after Hurricane Katrina, Together Louisiana’s Erin Hansen said. Following the storm, some questioned whether New Orleans and southeast Louisiana should even be rebuilt, prompting local and state leaders to respond by highlighting the significant role Louisiana played in the nation’s economy.

“If we’re such an important economic driver for the country, how come our public services are crumbling and how come our people are so poor?” Hansen said, recounting some of the questions she and others had at the time. 

Scrutiny of ITEP increased in the wake of the Great Recession. According to LED, ITEP contracts deprived local governments of $10 billion in property tax revenue from 2008 to 2015. Residents, journalists and government officials questioned whether the program was actually creating enough jobs to justify $10 billion worth of tax breaks. 

At that time, the ITEP program did not require companies to create jobs. Also, a single state entity, the Board of Commerce and Industry, had sole authority to approve or deny ITEP applications for any project in the state. 

Comprising appointed members not accountable to voters and often far removed from the parish officials and residents most directly affected by ITEP, the Board of Commerce approved nearly every ITEP application it received. From 1998 to 2016, it received 12,000 applications for exemptions and approved 99.95%, according to the IEEFA report. 

Together Louisiana characterized the Board of Commerce as “rubber stamp” approval for “corporate welfare.” 

Uncertain future

One of Edwards’ early acts as governor ushered in reforms to ITEP that have maintained general bipartisan support in the Louisiana Legislature. Most notably, his executive orders added local control to the approval process so that ITEP applications receive parish or city approval. Also, companies have to commit to creating a set number of jobs and are limited to an exemption of 80% rather than 100% of their assessed property value.

The future of the reforms is uncertain. Because they were introduced via executive order, a future governor can easily reverse them. Lawmakers’ efforts to codify them into state statute have thus far failed, running into heavy opposition from business lobby groups. 

Bills to codify local government control of ITEP gained traction in recent years but hit roadblocks in the Senate. One filed this year by Sen. J. Rogers Pope, R-Denham Springs, failed in a 14-21 vote. Another filed in 2021 by Rep. Barry Ivey, R-Central, received unanimous support in the House but failed in the Senate Revenue and Fiscal Affairs Committee.

Although some lawmakers have voiced support for the reforms, they haven’t backed them with votes. When Pope’s bill was under consideration earlier this year, Sen. Jay Morris, R-West Monroe, suggested a compromise amendment that would give local taxing bodies control of a portion of the property taxes due to them. That effort also failed. 

At the time, Morris said forces conspired against his amendment because they wanted to see ITEP returned to its full exemption status after Edwards leaves the governor’s seat in 2024.

Ivey made similar comments in a text message Wednesday. 

“I recognize the need for reform, and I have worked with the local governments on a solution that works for them and for [Louisiana] Economic Development,” Ivey said. “The reality is that deep pocket corporate special interests will likely not allow any changes under this governor. Why would they when they can ‘reform’ the program next term with a new Republican governor and permanently tip the scale and add even more [money] on top of it?”

‘This giant natural experiment’

Many policy makers begrudgingly tolerate tax incentives because they genuinely believe the claim that tax breaks are necessary to create jobs, according to Greg LeRoy, an economic development consultant and author of the book, The Great American Jobs Scam. LeRoy spoke at a conference Together Louisiana held Tuesday to unveil the IEEFA report and gave a follow-up interview to the Illuminator.

LeRoy explained that it’s often tempting to think of tax breaks from a simple economic theory that a state will attract jobs by offering this one thing that is valuable specifically to businesses. 

In a 2016 report, Louisiana Economic Development expressed concern that ITEP reforms would damage the state’s business climate, writing: “Absolute changes to the amount exempted or the term of the exemption will cause Louisiana’s rank in tax competitiveness rankings to drop, negatively impacting major business climate rankings and perception of the State’s business climate as a whole.”

LeRoy said the “business climate” argument needs to be laid to rest. Corporate lobby groups have spent decades equating tax breaks with terms such as “business-friendly climate,” but that’s an oversimplification that ignores many other important factors required to create a truly attractive place for business investment, he said. 

Many people say, ‘well, if I move to Louisiana or I move to New Orleans or Baton Rouge, I’ve got to put my kids in private schools because public schools are so disinvested,’” LeRoy said. “Well, that’s a tax…It’s not a winning calculus for economic development.”

LeRoy said there’s a half-century body of academic evidence that shows education and infrastructure are proven winners for economic development. The data shows that when people move, they most often move to metro areas that have higher tax rates because those are the places with the best schools and the best quality of life, he said.

“What’s happened here for the last six years is like this giant natural experiment,” LeRoy said. “Now we have all this fresh evidence from Louisiana.” 

According to the IEEFA study, in almost every case where an ITEP application was partially or completely rejected, the project was still completed — showing that the tax exemption “was not a major factor in the location of industrial projects.” 

“It’s a matter of balance,” LeRoy said. “When you strangle your public sector, you poison your business climate.”

Coincidentally, the Louisiana Legislative Auditor released a report Wednesday that found ITEP cost local governments $1.5 billion in property tax revenue last year, even with the reforms in place. Parishes with the highest amounts of ITEP exemptions per capita had higher property tax collections overall.

“People need to know what’s at stake,” Hansen said. “This is what’s at stake — all this money.”

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