Nathan Rupp, MPP, Staff Writer, Brief Policy Perspectives
Louisiana, like many states, is in debt. Under the supervision of Governor Bobby Jindal, the state went from having a billion-dollar budget surplus to a $1.6 billion deficit. In January 2016, John Bel Edwards was elected Governor, succeeding the term-limited Jindal. Since taking office, Edwards has tried a number of approaches to increase revenue for the state, mostly through sales tax hikes. However, this has not been enough to pull the state budget out of the red. The Governor’s most recent proposal is a reexamination of the state’s property tax code. Like many states, the property tax code in Louisiana provides tax relief as an incentive to businesses that want to expand existing or build new facilities in the state.
The program is aptly called the “Louisiana Industrial Tax Exemption Program.” According to Louisiana Economic Development Office, “The Louisiana Industrial Ad Valorem Tax Exemption Program (ITEP) is an original state incentive program which offers an attractive tax incentive for manufacturers within the state. The program abates, up to ten years, local property taxes (Ad Valorem) on a manufacturer’s new investment and annual capitalized additions related to the manufacturing site.” Basically, this program was set up to bring business to the state in hope of better the economy as a whole. But how well has this worked out?
The primary reasoning behind this exemption is to make the state competitive and encourage investment and job creation. “In order to be competitive for investment and job creation, business has to see that a state has this program.” Says Jim Patterson, a tax expert at the Louisiana Association of Business and Industry, the largest pro-business lobbying group in the state, the exemption is “a key economic development tool” intended to bring jobs to the state and prop up local economies. To evaluate this claim we need to consider two things: 1) how many jobs have been created from this program, and 2) whether this program benefits the state as whole.
Just about every state has some sort of industrial tax exemption program. However, the Tax Foundation, a conservative-leaning think tank, calls Louisiana’s incentives “unusually generous.” By this, The Tax Foundation may be pointing to the fact that these are not “incentives,” in any meaningful sense, because the exemptions are automatic and non-discretionary; meaning that, simply by qualifying, an application will be accepted on face-value without consideration. There is no return-on-investment analysis or requirement for job creation, marginal economic growth, or projected net benefit. Since there is little to no oversight, most subsidies are granted for the routine replacement of machinery, rather than the expansion or relocation of a new facility. Thus, the ITEP program doesn’t create any incentives for businesses to move to the state or expand, but instead encourages them to write off property taxes that they would have had to pay anyway
Another procedural oddity in this policy is the lack of local input at the parish level. The vast majority of states with these types of programs require local government approval before an application can move forward. Corporate tax incentives are common in economic development, both from a local and national level. However, Louisiana’s ITEP has neither a mandate nor a mechanism for perish regulation. This provision makes residents and some representatives in the state feel that the lobby of corporate interest rather than local interest is who is most served through the granting of these exemptions.
When looking at the raws job creation numbers, not much good news is to be found. Together Louisiana, a grassroots advocacy group consisting of religious and community non-profits, recently published a report about the ITEP, which calculated $16.7 billion in lost revenue for local governments over the past decade, yielding only 31,150 permanent jobs by companies that were granted these exemptions. Additionally, this report shows $1,433,556,778 in lost tax revenue due these exemptions in the most recent fiscal year. That works out to $535,343 for each job created.
Since this is a property tax exemption, the local government administers the policy. As shown below, these revenue losses make up massive amounts of spending that will not go to local perish budgets.
In response to these findings, on October 21, 2016, the Louisiana Board of Commerce and Industry adopted Governor Edwards’ executive order reforming the exception program. Under the new ordinance, the Governor will only approve contracts that have an initial term of five years or less at the full 100% exemption. If a contract is renewed, it can only be for three years or less and provides for an exemption of up to 80% or less. Additionally, the practice of the state government exempting industries from local property tax will no longer occur. Now perishes will give approval for new and renewed contracts. With these progressive changes, the Governor is both showing that he will hold industry accountable to their fair share of property tax while giving the perishes the ability to control their own tax revenue.
This executive order is a first attempt to rebalance the Ad Valorem property tax code for the state, so that the interest of corporate industries do not trump the intended goal of this program – local economic development. So when looking back to the question posed in the title, “who’s paying for Louisiana’s industry” we can say that the burden is no longer going to fall so heavily on the local level millages. Rather, under this executive order, the burden will be shared by the industries. Taxpayers will no longer have the state dictate if their perishes front the expansion of industry at the expense of their needed revenue.