New LA ITEP rules allow for bad policy

Want to go about implementing in the wrong way new directives about a tax break in Louisiana? Look no further than action taken by the Orleans Parish School Board in July.

Earlier this year, Gov. John Bel Edwards had revamped the implementation of his executive order dealing with the Industrial Tax Exemption Program. This allows the state to waive local property taxes for projects that introduce or expand a business for up to ten years.

Originally, the order allowed several different local governments to weigh in on a decision that could create outcomes spanning from entire shielding to no shielding at all of tax liability. This created confusion and uncertainty both for the petitioners of the credit and the governing authorities trying to figure out what they should do.

The revision stipulates awards as much as 80 percent for up to ten years. However, the select local governments have between 30 and 60 days after awarding to veto that.

Thus, OPSB served advance notice of which kinds of awards it wouldn’t veto. It said the business must be located in an area containing residents who make less than the state's average household income, or the business is located in an impoverished area where tax breaks can encourage business investments to provide residents jobs; jobs created from the project must meet the job and payroll requirements for eligibility for the Louisiana Quality Jobs Rebate program; at least 35 percent of new hires must live in New Orleans, or have attended New Orleans public schools within the last three years, including current students who may be offered paid internships; and, that construction on the project has yet to start before gaining approval from the OPSB.

Understand the reason for ITEP: with the country’s highest homestead exemption rate, constitutional restrictions on local sales tax rates, and no local income or fuel taxes permitted, local governments gouge businesses on property taxes. Orleans Parish, consolidated with city government except for the constitutionally-separate offices, is the worst offender of all in the state: the city’s rate of almost 89 mils by far tops any other, and the parish figure of around 149 (it varies slightly depending upon neighborhood) even exceed Caddo Parish’s confiscatory over 146.

This weighs heavily on businesses, as data show when comparing the Crescent City to the largest city in each of the states plus Washington, DC. Among them, in 2015 New Orleans had the 40th highest effective rate (assessed rate adjusted by exemptions) for homesteads, the 29th highest for apartments, the 25th highest for commercial property, and the 10th highest for industrial use. Generally speaking, Louisiana has a low per capita property tax break as a whole – 43^rd among the states – making New Orleans’ comparative high nonresidential rates even more eyepopping.

So, ITEP serves as a palliative to otherwise exorbitant rates. But the new OPSB rules make the award far more restrictive. Although not exceptionally demanding in qualification, the quality jobs break requirement will deter some.

But the residency/schooling standard makes it far less feasible from an area with a black majority population whose working-age males historically have had nearly half not working – through a combination of poor schooling, welfare availability, and lack of jobs, which will become scarcer – if additional costs to do business are foisted upon employers such as through inability to secure relief through ITEP. Locating in lower-income areas also will prove discouraging, and the new rules add no additional incentives to those already choosing such placement because of low property taxes and other breaks to begin with.

Don’t expect many rejections, because few firms even will try, in part because fewer now will seek to expand or institute operations in New Orleans. Instead, they’ll either stay away from the region or locate themselves in Jefferson Parish or others nearby – assuming that the local governments located in those places won’t impose as draconian standards. Simply, these will discourage economic activity in New Orleans and perpetuate a vicious cycle where governments going hungry for revenues will consider strangling the golden goose further rather than reforming fiscal systems or spending practices, until the area becomes the next Detroit.

Fiscal reform that allows lowering of property tax rates to quit penalizing business, such as lowering the homestead exemption, makes for the best strategy. Absent that, which will not happen anytime soon, local governments as they adjust to these new rules must recognize the counterproductive nature of policies like that of the OPSB and avoid viewing the productive class as mere piñatas waiting for a good busting.