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When it comes to the ITEP debate, what does Texas do?


March 28, 2019
By Annie Ourso Landry
Originally Posted on Greater Baton Rouge Business Report

When Baton Rouge school board officials in January delivered the city’s first denial of an Industrial Tax Exemption Program request to ExxonMobil, business groups rushed to condemn the decision while renewing their pleas for another round of ITEP reform. Their Louisiana battle cry was a simple one: Adopt a more predictable approval process for companies.

But what exactly would another program reform—or ITEP 3.0—look like?

One idea gaining traction is the creation of a single point of contact, or a committee, in each parish to consider tax abatements, rather than have companies go before three or four public bodies for approval. The Louisiana Association of Business and Industry and the Baton Rouge Area Chamber have both proposed versions of this idea.

It’s modeled, they say, after a similar process in Texas. But Together Baton Rouge, which has led the charge for local control, disputes that claim, saying corporate tax breaks in Texas can only be granted by the local taxing entities themselves.

So who’s right? According to Texas law, Together Baton Rouge. Yet, the claim of a single point of contact does hold up—to a degree.

Companies seeking tax breaks in Texas often do so through regional economic development groups, which contract with municipalities to review and shepherd deals through the process. If an investment is deemed worthy, the group structures a deal and brings it before the required local taxing entities for approval.

According to Texas economic development officials, this is probably what Louisiana leaders mean by a single point of contact.

Much like Louisiana, Texas laws dealing with tax breaks are anything but simple. Which, in part, is why both companies and local governments work with economic development groups to help navigate maze of what’s available. This state, it could be said, offers similar assistance through Louisiana Economic Development and regional groups like BRAC.

The striking difference, however, is local governments in Texas have had a say in the matter far longer than those in Louisiana. Over the years, both public entities and economic developers have come to know what they’re doing and, perhaps most importantly, have established good working relationships with one another, according to Texas officials, like former BRAC executive Iain Vasey, now the CEO of the Corpus Christi Regional Economic Development Corp.

That creates a certain level of trust in Texas that deals will be predictable, fair and vetted through objective analysis. But—and this is often not mentioned when pining for a Texas solution—it didn’t get this way overnight.

“In Texas, because of our history of managing incentive agreements through various levels of elected boards, there are very few surprises,” Vasey says. “It’s a matter of experience and knowledge in having seen these types of projects before and knowing how it will benefit elected agencies in the long run.”

It takes time, Vasey adds, “to build these working relationships to understand the different viewpoints people bring to a deal.”

 

LOUISIANA VS. TEXAS

Although Texas localities may be more proficient at administering tax exemptions, the laws and processes surrounding such exemptions don’t appear any less complicated or bureaucratic than those in Louisiana.

In fact, while Louisiana has just one program for industrial property tax breaks, Texas has several tax codes that govern tax exemptions for separate taxing entities. That means companies must apply separately to various agencies, such as the county commission, the school board and any smaller entities that may be affected by tax exemptions.

Two chapters of the Texas tax code are most similar to ITEP. Chapter 312 covers property tax abatements for cities and counties, in which a company, if approved, may exempt all or part of its property for 10 years. Securing 312 agreements requires designating a reinvestment zone for the property via a six-step process (See graphic online here).

School districts cannot enter into 312 abatement agreements, an exclusion many in Louisiana often note. But Texas does allow school tax breaks, just under a different name—Tax Code Chapter 313.

Otherwise known as the Texas Economic Development Act, Chapter 313 allows a 10-year “limitation” on taxable property for school districts. These agreements, limited only to new investments, must be approved by the school district and the state comptroller’s office.

How 312 and 313 agreements are administered vary across Texas. The process is highly localized, with each taxing entity in charge of adopting guidelines for approval, similar to what Baton Rouge has done. And, yes, as BRAC has pointed out in the past, regional economic development agencies in Texas are often the point of contact for companies seeking tax breaks.

The Greater Houston Partnership, for instance, acts as a “one-stop shop” to evaluate projects and facilitate discussions between companies seeking exemptions and local officials who grant them, says Jason Ford, the vice president of regional economic development who formerly worked at LED under the Jindal administration.

“Economic development in Texas is driven at the local level,” Ford says. “Developing agreements can vary widely across jurisdictions.”

The ultimate goal, he says, is to attract investments while ensuring enough resources for public services. To strike a balance, economic development agencies like Ford’s provide objective analysis on the costs and benefits for all stakeholders involved, as well as facilitate communication among them.

“In Texas, we have a long history of the one-stop-shop model in economic development,” Ford says, “which means bringing together all stakeholders and having one organization that helps bring them together.”

Economic development groups also perform compliance after the fact, holding companies to their word in terms of investments and job creation, Vasey adds. 

“We’re very cautious about these things,” he says. “We’ve established a review process and standards that are highly technical. The reality is, it’s a grind.”

Still, not everyone in Texas supports tax abatements, which have received political pushback from both the extreme edges of the political left and right. In 2017, Texas lawmakers tried unsuccessfully to kill Chapter 313 incentive deals, and this year the state Legislature will debate whether to extend Chapter 312, set to expire in September.

Texas Gov. Greg Abbott, who visited Baton Rouge in March, tells Business Report he expects the 312 incentive program to be renewed, as incentives play an important economic development role in the state.

“There are so many businesses coming to Texas,” Abbott says. “It’s always an evaluation—what incentives are really needed?”

But he adds that tax incentives are just one of the many perks in the package Texas offers businesses, which also includes zero business income taxes and the governor’s proposed limits on property taxes.

 

PREDICTABILITY

So does this mean tax incentives in Texas are more predictable than Louisiana? It depends, experts say, on which county you’re talking about.

Scott Martinez—president of the North Louisiana Economic Partnership who has also served in economic development roles in Houston and Austin—shuns the whole idea of comparing Louisiana and Texas when it comes to a predictable ITEP solution.

“Texas is the wrong place to look because there is no singular model,” Martinez says, adding the state has 254 counties compared to Louisiana’s 64 parishes. “Texas is so nuanced. A lot of the decision-making is delegated to local governments, which have broad flexibility as to what they can do.”

Meanwhile, Louisiana’s ITEP has long been driven by the state and still is to some degree, even though Gov. John Bel Edwards has given local governments a voice.

Still, what can’t be ignored is the basic difference in governing philosophies between the two states: Texas embraces a largely decentralized model across the board, giving broad control in most matters to local government; Louisiana, on the other hand, has been doing largely the opposite since the populist, redistribution of wealth days of Huey Long.

Business groups understand this fundamental difference and realize Louisiana can’t exactly replicate Texas. Rather, they want to emulate the policy-driven, professional and efficient approach Texas implements on the local level when it comes to tax incentives.

Where Louisiana is losing, says LABI President and CEO Stephen Waguespack, is on how our policies are being applied. He argues the process worked better two years ago when LED was at the table explaining the deals to stakeholders.

“Now we have all these people trying to be highly technical economic development experts,” Waguespack says. “LED has to be a the table explaining this. Single point of contact is the way to go.” 

BRAC agrees with the idea of streamlining the process, as well as providing objective analysis, which the chamber already assists with, but it doesn’t necessarily want to model Texas.

“We should be more competitive than Texas,” says Liz Smith, BRAC senior vice president of economic competitiveness. “If Texas is who we compete with, why would we want to be like them?”

Nearly everyone in the business community agrees, though, that the goal for ITEP is predictability, and the challenge, of course, is how do we get to that point.

Martinez maintains it’s a learning process. The switch to local control was the right move, he says, but the way it was implemented is the problem, as it was such a drastic departure from what Louisiana has always done, creating confusion among local governments.

He’s not convinced the single-point-of-contact idea is the solution. Economic development groups like his already act in that capacity, he says, yet there’s still a disconnect. The Caddo Parish Sheriff and school board, for instance, denied an ITEP request in 2018 that Martinez supported. And such instances play out in Texas as well.

But returning back to the way things once were in Louisiana, which critics say was the state rubber-stamping all ITEP requests, is also not the way to go.

“It was predictable but was it good public policy?” Martinez asks. “We have to come up with something predictable but also something that is good public policy.”