Riegel: Local control over Louisiana’s Industrial Tax Exemption Program makes sense

Gov. John Bel Edwards set off alarm bells in June 2016, when he issued an executive order designed to rein in the state’s Industrial Tax Exemption Program.

The 80-year-old ITEP is something of a sacred cow in Louisiana, and is considered one of the most valuable incentives in the state’s economic development tool kit.

After all, it’s not like Louisiana has great schools or infrastructure to offer. But a tax break? That’s easy, especially when it’s someone else’s money.

Until the executive order last summer, the state generously exempted large manufacturers from paying local property taxes for five years—and then routinely rubber stamped their five-year renewal requests.

But over the decades, as local governments were denied the property tax revenues that typically fund local government services, they became increasingly reliant on the state for help. Which is among the many reasons the state is always on the brink of financial disaster.

To tackle the fiscal dysfunction, Edwards made several controversial changes to curtail the ITEP. Among them: He gave the local governing bodies that are directly affected by the loss of property tax revenue—specifically, parish councils, sheriffs and school boards—authority over whether to grant the exemptions.

This was greeted with howls of protest at the time, but it makes sense. It’s also the way every other state with an industrial tax exemption does it, including Texas, with which Louisiana hopelessly compares itself and tries to compete.

Now, 15 months after Edwards issued his order, the first batch of new applicants for the ITEP is coming up, and local governments will soon be called upon to weigh in on whether to grant the lucrative incentive.

Understandably, the Baton Rouge Area Chamber is nervous. It’s afraid local governments will get greedy, impose dysfunctional bureaucratic requirements on applicants and drive manufacturers away.

On the other side of the issue is Together Baton Rouge, which is lobbying local governments to restrict exemptions as much as possible. The faith-based activist group would like to see manufacturers pay more local millages to help fund things like teacher pay raises, drainage improvements and police body cameras.

BRAC says this line of reasoning is fallacious, arguing that without the exemption there might not be any industry to pay a tax.

“Zero percent of a billion dollars is zero,” BRAC’s Kyle Zeringue says. “If you drive away the investment you have nothing.”

The reality is that both sides have a point. Local governments should have control over exemptions that will directly impact their community. But they need to use their newfound authority wisely or they risk doing more harm than good.

How do you strike the balance?

“But you don’t win a deal based on incentives. You win based on things like workforce training, logistics and infrastructure. Incentives only make a difference when everything else is equal.”

—Iain Vasey, former BRAC executive who now heads the Corpus Christi Regional Economic Development Corp.

For some insight I called Iain Vasey, a former BRAC executive who now heads the Corpus Christi Regional Economic Development Corp. He recently helped snag that $10 billion ethane cracking plant Louisiana had been competing for, and knows a thing or two about industrial tax exemptions.

In Texas, industrial tax exemptions are and always have been controlled by local governments. Vasey says the system works well there for a couple of reasons.

First, the process by which exemptions are awarded is well established, transparent, efficient and perceived to be fair, not that it’s particularly easy. A company seeking an exemption in Vasey’s Nueces County has to apply separately to the county commission, the school board and any number of smaller entities that might be affected.

It’s time consuming and a bit bureaucratic. But the entities, though independent, collaborate—which is key—and there’s a lot of communication between them and the companies.

Second, applicants are subject to careful scrutiny. If the deal they’re pitching doesn’t make sense for the local community the exemption is denied. If the exemption is granted, it’s reevaluated regularly, in some cases as often as every quarter, to make sure things like job quotas are being met.

“Compliance is big here,” Vasey says. “And it’s all handled at the local or regional level.”

It’s important to realize that major corporations are accustomed to dealing with local governments and expect the scrutiny. They don’t mind being held to high standards, Vasey believes, as long as the rules are consistently applied and communicated up front.

“Sophisticated companies are used to this,” he says. “The thing they are looking for is professionalism, and a fair and open process.”

But there’s a bigger issue that Vasey has come to realize in his more than two years in Texas. When it comes to incentives, Louisiana and Texas are about equal.

“But you don’t win a deal based on incentives,” he says. “You win based on things like workforce training, logistics and infrastructure. Incentives only make a difference when everything else is equal.”

That’s the sad reality. Little between Texas and Louisiana is equal anymore, least of all workforce training, logistics or infrastructure.

Which underscores why it’s important to give control over industrial tax exemptions to local governments. Perhaps if they have more money to devote to education and infrastructure the state will be more competitive in the long run so we don’t have to spend as much time worrying about how to give money away.

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