Here's how the Baton Rouge Area Chamber's "matrix" for evaluating industrial tax exemption requests compares to how Texas counties approach the same kinds of tax exemptions.
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Download the full study here.
Why this issue matters now
Since 1936, Louisiana has been the only state in the nation to endow a state-level board with the authority to approve corporate exemptions from local property taxes, without the approval, or even knowledge, of the local entities paying the cost of those exemptions. It’s called the industrial tax exemption program, or ITEP, and it is the largest program of state subsidies to corporations in the nation.
In the current fiscal year, local governments in sixty of Louisiana’s sixty-four parishes are losing $1.9 billion in revenue due to ITEP exemptions. The exemptions affect the budgets of cities, parishes, sheriffs departments, fire districts, libraries, parks — any entity that receives revenue from a local property tax millage. The entities hardest hit by ITEP are Louisiana’s public schools. In 2017, Louisiana’s school districts are losing $720 million in revenue due to ITEP, fully 20% of total state and local funding for public schools.
Due to an Executive Order signed by Gov. John Bel Edwards in June 2016, local school districts, sheriff departments, parishes and cities, for the first time in 80 years, will have the authority to determine for themselves whether to approve industrial tax exemptions and on what terms. The first ITEP applications subject to the Executive Order are going before local bodies over the next several months.
[Download a pdf of the entire study here.]
A well-funded lobbying campaign is underway across the state to attempt to convince local school districts and other public bodies to grant automatic approval to industrial tax exemptions, without any analysis of whether the projects requesting subsidies require a subsidy or bring a public benefit. The campaign already has convinced one parish, West Feliciana, to grant prior approval to all future exemption applications, site unseen.
Louisiana Economic Development (LED), the state agency which administers ITEP and which local entities are looking to for information, has declined even to give an assessment of how much the exemptions are costing those entities at the local level.
There is a need for independent analysis of how industrial tax exemptions have performed at the local level, to help local governments, officials and citizens apply the scrutiny that has been lacking at the state level in the past.
This report seeks to help fill the need for independent analysis to help public officials develop procedures for vetting exemptions going forward that fulfill their constitutional obligation to use public resources only for public purposes.
Introduction: incentives vs. gifts
There is a difference between an incentive and a gift.
An incentive motivates or encourages someone to do something they otherwise would not have done. A gift is given freely with no expectation of anything in return.
The Louisiana constitution authorizes incentives for economic development. It does not authorize gifts.
Into which category do Louisiana’s industrial tax exemptions fall?
To what extent have the exemptions encouraged manufacturers to make investments they otherwise would not have made, rather than merely subsidizing routine investments companies would have made anyway?
What are ITEP’s outcomes for business attraction, business expansion and job creation? What are its costs in foregone revenue to local taxing bodies?
Do the program’s outcomes justify its costs?
These are straightforward questions — the kinds of questions that are asked and answered routinely for any government program operating within the normal bounds of public accountability.
One of the most unusual things about the industrial tax exemption program is the extent to which it has not operated within those normal bounds.
ITEP is Louisiana’s most expensive economic development program, by a wide margin. In 2017 alone, the program cost $1.9 billion in foregone tax revenue to local taxing bodies, five times the cost of the combined total of the state’s other major corporate development incentive programs. On a per capita basis, ITEP is the single largest program of state subsidies to corporations in the nation — roughly twice as large as the second place program.
Yet throughout the entirety of ITEP’s 80-year history, Louisiana Economic Development, the state agency that administers ITEP, has never:
- conducted a cost-benefit analysis of the program,
- calculated how much the exemptions are costing local taxing bodies in lost revenue each year,
- evaluated ITEP’s track record for business attract, business expansion or job creation,
- assessed the extent to which the investments ITEP subsidizes would have been made anyway without the subsidies.
The purpose of this report is to answer those questions, looking specifically at East Baton Rouge Parish from 1998 to 2017.
ITEP at a crossroads
On June 24th, 2016 Governor John Bel Edwards signed an Executive Order which has the potential to bring about the most significant reforms to ITEP in the program’s history. The order, coupled with a supplementary one issued a few months later, makes four basic changes to the ITEP program:
1) It makes job creation a requirement for receiving an exemption,
2) It renders “miscellaneous capital additions” ineligible for exemptions and prohibited,
3) It establishes a cap on exemptions’ second terms at 3 years and 80% of the property taxes that would be owed (instead of 5 years and 100%),
4) It devolves decision-making authority over whether exemptions are approved and on what terms to the local taxing bodies that bear the exemptions’ costs, specifically school districts, parish governing authorities, sheriffs and municipal governments (if the applicant company is within a city).
We’ve described these reforms as “potential” rather than established for two reasons. First, the executive order grandfathered in a large number of exemptions under the old rules. Exemptions in their first ITEP term and those for which an “advance notice” was submitted prior to June 24th, 2016 are not subject to the executive order. The new batch of exemptions — the ones subject to the local approval requirement established by the Governor’s executive order — are only now beginning to be considered.
There’s a second, potentially more significant reason the jury is still out on whether change has come to ITEP — the question of what local officials will do with their new authority. Empowering local officials to make decisions about their own taxes, rather than allowing a distant, state-level board to make their decisions for them, might lead to different outcomes. Or it might not. It depends on whether those local officials approach their responsibility at all differently from decades of Commerce and Industry Board appointees who have approved ITEP applications at a rate 99.95% over the last twenty years.
Will local officials continue this grim tradition of rubber-stamping costly exemptions, without serious evaluation of whether the exemptions bring about a public benefit worth those costs? Or will our officials act with local interests more firmly in mind, which means establishing clear standards for evaluating ITEP applications that separate the “incentives” from the “gifts”?
That, in a word, is the presiding imperative facing local officials and citizens seeking to put in place responsible policies for ITEP in the future — to create a vetting process for exemptions that distinguishes the incentives from the gifts.
We’ve written this report to help with that process.
[Download a pdf of the entire study here.]
Background on ITEP
1) Started in 1936, the industrial tax exemption program, or ITEP, is Louisiana’s most expensive economic development program and the most expensive on a per capita basis, in the nation. ITEP is the principle driver behind Louisiana’s status as the country’s most generous provider of government subsidies to corporations.
2) Despite its size, Louisiana Economic Development never has conducted a cost-benefit analysis of ITEP or evaluated the program’s outcomes. Between 1997 and 2016, the board of Commerce and Industry considered 16,931 ITEP applications and awarded 16,923 exemptions — an approval rate of 99.95%.
3) The cost the industrial tax exemption program statewide has increased dramatically in recent years, from $953 million in subsidies approved in 2010 to $5.2 billion approved in 2016 — an increase of 544% in just six years.
ITEP’s record for business attraction & growth
4) ITEP’s role in attracting business or industry to East Baton Rouge Parish has been diminishingly small. Between 1998 and 2017, 814 ITEP exemptions were awarded in East Baton Rouge Parish, benefiting 76 separate companies or divisions of companies. Of those 814 exemptions, a total of nine — 1.1% of the total -- went to businesses that were not already operating in Baton Rouge. 98.9% of ITEP exemptions since 1998 went to existing businesses.
5) ITEP’s role in helping existing business expand their operations in EBR also has been small. Only 6% of ITEP exemptions in EBR Parish subsidized expansions or additions that increased manufacturing output. 94% of ITEP exemptions were for miscellaneous capital additions, equipment replacement or other forms of routine capital investment.
ITEP’s costs to local taxing bodies
6) The cost of industrial tax exemptions in lost revenue to local taxing bodies is large and growing. In 2017, ITEP cost local taxing bodies $70 million in lost revenue. ITEP’s cost in EBR has doubled since 2006, when it was $35 million.
7) Cumulative revenue losses to local taxing bodies from ITEP are extreme. Between 1998 and 2017, East Baton Rouge Parish taxing bodies lost $770 million in tax revenue on ITEP exemptions.
8) To compensate for the lost revenue from ITEP, property taxpayers in EBR pay higher property taxes at a rate of 17.9 mills . ITEP increased property taxes by $221 for the average homeowner in 2017 and $3,222 per homeowner cumulatively since 2000. The average cost increase in property taxes to non-homeowner properties, including non-ITEP businesses and rental properties, is $430 in 2017 and $6,524 cumulatively since 1998.
9) East Baton Rouge Parish’s local governmental entities are facing significant one-year revenue losses from ITEP affecting their 2017 budgets as follows:
Current One-year Cost of ITEP to Local Taxing Bodies
Local entity 2017 revenue loss
EBR Parish Schools - $28 million
EBR City-Parish - $9 million
EBR Sheriff - $9.4 million
EBR Libraries - $6.6 million
BREC - $8.8 million
EBR Fire Districts - $5.7 million
EBR TOTAL - $69.6 million
ITEP’s record for job creation
10) The 76 companies or divisions of companies that received ITEP exemptions between 1998 and 2017 collectively employed 9,857 full-time workers in 1998 or the first year each received its first ITEP exemption. In 2017 or the most recent year the companies received an ITEP exemption, the same 76 companies collectively employed 7,877 full-time workers. The change in full-time employment among companies receiving ITEP exemptions was a net decline of 1,980 jobs during the period of their exemptions.
11) The feebleness of this return on investment — $770 million in subsidies to companies that cut nearly 2,000 net jobs over a subsidy period — ranks ITEP as an uncommonly ineffective program of economic development.
12) The most expensive public subsidies and greatest jobs declines were both concentrated among a few “ITEP regulars.” Seven entities — out of the 76 receiving ITEP — received 88% of ITEP subsidies totaling $879 million in tax subsidies (some of which is approved for future tax years through 2026).
Cost & jobs among ITEP Regulars, 1998 - 2017
# ITEPs ITEP Subsidies Net change in jobs
Exxon Mobil (Refinery) 88 $349 million —> - 1,427 jobs
Georgia Pacific 36 $203 million —> + 105 jobs ($1.9 million per job)
Exxon Mobil (Chemical) 63 $129 million —> - 501 jobs
Exxon Mobil (Polyolefins) 28 $62 million —> - 138 jobs
Exxon Mobil (Plastics) 24 $49 million —> + 29 jobs ($1.7 million per job)
Formosa Plastics 32 $45 million —> - 340 jobs
Honeywell Intl. 54 $42 million —> +9 jobs ($4.6 million per job)
TOTAL 235 $879 million — > - 2,263 jobs
13) The zip code in EBR that is home to the largest ITEP subsidies is 70805, where 20 corporations received ITEP exemptions totaling $604 million since 1998. 70805 is also the zip code with the highest poverty rate (33%), 2nd highest unemployment rate (16%) and 2nd lowest median income ($26,133).
Download a pdf of the entire study here.