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Industrial tax exemption program under fire; manufacturing leader says critics short-sighted

May 22, 2018
By John Wirt
Originally Posted on Louisiana Watchdog

Gov. John Bel Edwards wants to make more changes to Louisiana’s 72-year-old Industrial Tax Exemption program.

Before Edwards’ 2016 executive order mandated revisions to ITEP, the state’s Board of Commerce and Industry had sole power to render state tax breaks at the local level. Edwards’ 2016 order altered that, requiring manufacturers seeking tax exemptions to gain approval from parishes, municipalities, school boards and other local tax entities.

Released earlier this month, Edwards’ new proposals would reinstate the 10-year exemption on local property taxes, granting an 80-percent break on taxes owed during the term. The governor’s previous change provided 100 percent property tax breaks for five years and the opportunity to apply for an additional three years of exemptions at 80 percent.

Together Louisiana, which consists of community and faith-based activist groups, and the Louisiana Association of Educators recently asked the East Baton Rouge Parish School Board to exclude the parish from the Industrial Tax Exemption Program.

Together Louisiana has long been critical of the ITEP. Like many things in Louisiana, the program is unique to the Bayou State, Together Louisiana organizer Broderick Bagert said.

“It grants a state board the authority to approve exemptions that affect local entities’ property taxes,” Bagert said. “Anytime an entity is in the position to give away somebody else’s money, it tends to do so with abandon. Not because they are unkind or malicious, but because they don’t experience the consequences of their own largesse. There’s no balance between the need for revenue to provide for public services and goods and the public subsidies for corporate development.”

Jim Patterson, vice president of the Louisiana Association of Business and Industry, defended ITEP, citing its incentive for economic growth.

“ITEP permits Louisiana to compete for the infusion of capital that comes with manufacturing facilities attracted by the incentive,” Patterson said. “Like Louisiana, four out of every five states offer a property tax exemption for new capital investment projects.”

But the problems with the ITEP, Bagert said, include a flaw that allows companies to claim tax breaks for ordinary annual expenditures.

“Because of that original structural defect, the industrial tax exemption program began to function as an entitlement,” Bagert said. “Any manufacturing entity in Louisiana would summit the entirety of their capital expenditures in a given year. But when most people think of exemptions, they’re thinking about a new business, a new project, a new plant, expansion of an existing plant, a relocation, an imminent closure. But no place other than Louisiana makes routine capital investment the basis of a public subsidy.”

Patterson cited manufacturing’s positive economic impact and the benefits of ITEP.

“Property taxes are paid during and after the ITEP period,” he said. “The land is taxable throughout the ITEP period. The value of land with a plant on it is substantially greater than it was as farmland or lying fallow. And once the exemption ends, the taxes that are collected generate revenue to the local governments that would not otherwise be there.

“Also, the facility is obligated for local sales taxes on its purchases and inventory taxes throughout the ITEP period. Add to this all of the taxes paid by the ancillary businesses and merchants that depend on the facility’s presence for their commerce.”

To the best of Louisiana Together’s knowledge, Bagert said, Louisiana is the only state that allows school district taxes to be diverted to industrial tax exemptions. Citing Louisiana Economic Development data, Louisiana Together puts ITEP’s cost to schools at $720 million.

“That is 20 percent of the total funding that schools received in Louisiana,” Bagert said.

Heavily industrialized parishes, Patterson countered, “are home to our best-funded schools and highest-paid teachers. Local government finances are improved over the longer term because more capital is invested into a facility. That’s what a strong manufacturing base can mean to a parish or municipality.”

Bagert and Louisiana Together want scrutiny at every level of the ITEP process.

“Particularly at the local level, with exemptions being approved under specific circumstances,” Bagert said. “When there’s a genuine incentive, when job creation is real and can be verified, when the benefits of the would-be investment outweigh the coast of the exemption.”

Patterson emphasized the long-term benefits the ITEP provide.

“Unfortunately,” he said, “there are those who insist on short-term gains that will ultimately cause significant revenue losses in lieu of the long-term gains. Many facilities can continue to grow and successfully compete for larger investment, in part, because of programs like ITEP.

“Louisiana’s economy is at a critical point,” Patterson warned. “The nation’s economic recovery has generated increased manufacturing activity and investment, yet Louisiana is not participating to the degree it should. Uncertainty and complexity in the state’s ITEP is partly to blame. If that continues, Louisiana’s manufacturing sector will contract, costing our workers their jobs and our governments their revenues.”