Given the bad hand Louisiana’s Constitution dealt him, Republican Gov. Jeff Landry did his best and largely successfully to fix problems created in the past few years with the state’s Industrial Tax Exemption Program.
ITEP reflects a constitutional power defined by the mostly gubernatorial-appointed Board of Commerce and Industry and the Department of Economic Development which allows it to exempt manufacturing firms from property taxes from value added to property used for discrete projects that create new or expand operations. However, the Constitution vests the final power in the hand of the governor whether to approve whatever emerges, so he can create the conditions for acceptance through an executive order, in essence saying that unless requests forwarded to him meet standards he articulates, he won’t approve these.
Historically, such supervision was minimal, leading to almost any project within the constitutional boundaries meeting approval, until Landry’s predecessor Democrat John Bel Edwards radically changed the rules, and for the worse. Understanding the negative impact begins with acknowledging that ITEP exists because of Louisiana’s confiscatory property tax rates insofar as these apply to business.
Because of the nation’s highest homestead exemption (plus a myriad of other smaller breaks), the state’s rates are artificially high because homeowning families, the majority of voters, don’t pay that but a reduced rate or nothing on all but municipal taxes if they live in one. Instead, it is foisted on businesses, especially industrial concerns which pay one of the highest per capita burdens in the country. The best solution as to what to do with ITEP would be to get rid of it entirely, but that would require an extensive overhaul of the state’s taxing regime that would take an entire term to accomplish.
So, ITEP then ideally serves as a palliative for too-high property taxation of large business investment. Unfortunately, in two iterations, Edwards changed this to making it a mechanism holding out the possibility of redistributing wealth, or even pursuing social justice aims. Three changes in particular opened the doors to this noxious combination.
First, he gave three or four (depending on whether a municipality was involved) kinds of local governments a veto power over an application. Second, this veto power was particular to the local government involved. Third, he insisted that application demonstrate the project’s completion would create jobs.
Together, these created a catastrophic situation for economic development, beginning with the complexity introduced. If Board approval came, then each of the three or four local governments got a crack at it, which in a small of number cases produced split decisions, creating bureaucratic complexity both within the tax collector (sheriff) and the business, where the latter served as a disincentive to invest.
In even fewer cases, they all vetoed the idea, which provided an even greater disincentive. In fact, advocacy literature disguised as quality and honest research even admitted tangentially that the new policy discouraged applications even as it trumpeted that few rejections occurred. But you can’t turn down something if it never gets submitted, either out of fear it’ll be wasted effort or simply not even contemplated because of the new rules, and you can’t reap the economic benefits of these projects never undertaken.
But the worst of all was the job creation requirement, which betrays both a fundamental misunderstanding of economic development and its use a cudgel to further political careers and special interest agendas. Political hacks and courthouse gangs liked the idea because then they could draw a direct line to their approval and a claim their actions put people to work.
Worse still, they could use that as a bargaining tool to further agendas inimical to economic development, if not the well-being of the community as a whole. A classic example came from the Orleans Parish School Board, which issued its own set of criteria for project approval that focused heavily on wealth redistribution and pandering to special interest agendas, rather than focus on policy that would create a rising tide to lift all boats.
Job creation is a potentially desired output from a tax break decision. But economic development is far more than that, and can be exclusive of that. The outstanding exhibit of why job creation can’t be the end-all-be-all of tax policy is the state’s Motion Picture Investors tax credit, which costs $13,300 per (mostly part-time) job created, and doesn’t even return a quarter on the dollar of this to taxpayers. You don’t have to create any jobs to make a decision where forgoing tax dollars boosts productivity and tax revenues that ripple through the entire local economy.
Wisely, Landry recognized these flaws and corrected them. He simplified the local review process to include for every decision just the chief executive or first among equals from a parish, school district, sheriff’s office (the sheriff or designee), and, when needed, mayor to vote collectively on the matter.
Better, he made this a nonbinding advisory opinion, so local governments no longer can throw up extraneous requirements. Best of all, he removed the job creation criteria and made the final decision – if approved by the Board with local input – his on the basis of overall economic development that recognizes the state’s punitive property tax structure for manufacturing concerns needs rebalancing to encourage capital investment.
He kept a provision that wouldn’t make exemptions retroactively applied and only for meaningful spending that could boost productivity. He also capped the break at 80 percent – including the option to go to 100 might have been better – for five years, plus as many more renewed once.
This is a far better use of ITEP, if we must have it, that will focus on aiding all participants in the state and local economies rather than select special interests. Landry continues to mean business that the state, after years of indifference if not hostility to this idea from Edwards, is open for business.
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