MORET: Pass This Plan And You Basically Waste All My Efforts

Louisiana Economic Development head Stephen Moret put out the results of a “preliminary” study his department did on the “deficit reduction” plan released last night by the Fiscal Hawks in the House of Representatives.

Moret might be overselling the impact of that plan, but it’s safe to say he doesn’t see many positives coming out of it.

The e-mail message accompanying the study is fairly descriptive…

The attached, preliminary analysis details tax increases associated with the plan, industry sectors that likely would be most affected, examples of major economic development projects that could be lost due to defaults on existing incentive commitments, and anticipated drops in national tax competitiveness and business climate rankings. Also addressed are fairness issues and implementation issues associated with the plan.

We may update this analysis as more information becomes available.

To say that I am gravely concerned about this budget proposal would be an understatement.

And within the analysis, that “grave” concern begins to flesh out…

  • The proposal recommends increasing taxes on businesses and families by $329.2 million in FY14 alone, with approximately 95 percent of that total falling on businesses.
  • Proposed tax code changes (principally reductions in statutory exemptions) suggest that corporate income and franchise tax collections would increase by roughly 40-50 percent based on the most recent Revenue Estimating Conference (REC) forecast for FY14.
  • Chemical plants, refineries, paper mills, and other large manufacturing facilities (e.g., shipyards) likely would experience the largest increases in tax burdens due to the proposed increases in sales taxes on nonresidential utilities and manufacturing machinery and equipment (MM&E).
  • LED will be forced to break preexisting incentive commitments to a variety of different firms (both existing companies that are expanding as well as new companies investing in Louisiana for the first time).
  • Drilling in the Haynesville Shale, already sharply reduced due to a national glut of natural gas supply, will be negatively impacted by the proposed increase in severance taxes caused by a reduction in the horizontal drilling exemption for new wells.
  • Many of the proposed tax increases (e.g., reduction in the net operating loss deduction and increases in taxes on nonresidential utilities and MM&E) will have a particularly significant negative impact on small businesses located throughout Louisiana.
  • Without question, the plan’s recommendations collectively would result in the loss of thousands of future jobs in our state while threatening many existing jobs.
  • With significant increases in tax burdens as well as withdrawals of previously committed incentives, Louisiana’s national rankings for tax competitiveness and business climate will materially decline over the next 12-18 months.

That’s just an overview. Moret gets a bit more specific when he begins to talk about specific impacts of the plan on projects LED has been working on…

  • The proposal postpones implementation of the new Competitive Projects Payroll Incentive (CPPI) for three years (through June 30, 2016), which will negatively impact several of the largest manufacturing projects in state history. For example, this incentive was utilized to secure the new Sasol gas-to-liquids and ethane-cracker complex in the Lake Charles area, the biggest single manufacturing project in state history ($16-21 billion capital investment, as well as 1,250 jobs with salaries averaging nearly $90,000 per year, plus benefits). Accordingly, the State will have to renegotiate that incentive package with Sasol in the hopes of retaining the project.
  • The proposal specifically removes $2 million in LED FastStart funding (100 percent of what is needed) for training commitments associated with the new Benteler project at the Port of Caddo-Bossier, which would cause the state to default on its workforce commitments for that 675-job, $900-million project.
  • The proposal cuts the Industrial Tax Equalization Program by 15 percent, which will cause the State to default on previous commitments to secure the corporate headquarters expansion of Fortune 500 CenturyLink (more than 1,100 new professional jobs being created in Monroe).
  • The proposal cuts the Quality Jobs Program by 15 percent, which will cause the State to default on previous commitments to secure a significant expansion of the Procter & Gamble facility in Pineville (which includes a relocation of some jobs from Georgia), as well as the 600-job expansion of the Schumacher Group headquarters in Lafayette.
  • The proposal reduces the Digital Interactive Media and Software tax credits by 15 percent, which will cause the State to default on previous commitments to land the 600-job EA project in Baton Rouge and the nearly 150-job Gameloft project in New Orleans, while hampering the growth of Oscar-winning Moonbot Studios in Shreveport.
  • Because most of LED’s contracts are associated with incentive agreements, a 10-percent reduction in the state general fund (SGF) portion of contracts would require LED to default on some of its existing contractual commitments associated with major economic-development projects.

And then Moret goes into the future projects his group is working on that he believes will be negatively impacted by the fiscal hawks’ plan…

  • The postponement of CPPI implementation means LED will have to withdraw a recently made proposal to secure a relocation of one of the largest firearms manufacturers in the country while also requiring LED to attempt to renegotiate a nearly complete CEA for the second biggest manufacturing project in state history (not yet announced). Several other potential projects also will be negatively impacted, each of which would have created hundreds or thousands of new manufacturing jobs in Louisiana.
  • The elimination of $10 million in FY14 funding for the Rapid Response Fund (100-percent reduction in new funds) will require LED to withdraw several
  • outstanding proposals for significant economic-development projects around our state. The most significant impacts are anticipated in Shreveport, New Orleans, and Baton Rouge. Additionally, a state/local effort to retain and expand the McDermott fabrication yard in the Bayou Region would be seriously threatened.
  • The postponement of the Corporate Tax Apportionment Program will result in Louisiana continuing to be uncompetitive (from a tax perspective) for corporate headquarters relocation projects.
  • With a 15-percent across-the-board reduction in economic development incentives, the State will be required to send revised, lowered incentive proposals for 50-70 active, competitive business recruitment and business expansion projects for which LED already has provided incentive proposals. Obviously our prospects for success will decline substantially as a result. Every region in Louisiana will be impacted.

Then Moret laments the loss of Louisiana’s national rankings and recognition for a business-friendly climate…

  • Increased taxes on nonresidential utilities and MM&E combined with reductions in incentives for job creation and research-and-development activities will cause Louisiana’s national business tax competitiveness rankings to materially decline within 12-18 months.
  • Increased taxes, increased uncertainty, and broken incentive commitments will result in material reductions in Louisiana’s national business climate rankings (e.g., Forbes, Pollina, Site Selection, Chief Executive, Area Development, Business Facilities) and, more importantly, a significant decline in our state’s reputation among business executives around the country.

As one might imagine, Moret isn’t a fan of the plan.

What’s starting to become evident here is that the fiscal hawks didn’t really bother to discuss their ideas with Moret, or the local chamber of commerce groups, or many of the business trade groups or any of the other stakeholders involved.

It was bad enough when the Jindal administration attempted to craft an income tax repeal plan without getting input from those stakeholders, and Gov. Bobby Jindal paid a substantial price for that omission when LABI came out against it. Not only did the fiscal hawks repeat his mistake, but they went one further and apparently engaged in even more indifference to the people who, as Republicans, they would count on for support.

The theory behind this mess? It appears the fiscal hawks became a bit unhinged in their disgust for Jindal, and determined to best him in the budget process. And that determination to stick it to the governor looks like it might have overridden their better judgement – because at some point when you’re trying to sell a $300 million tax increase on business and you’re a Republican, you’ve got to realize you’re on the wrong track.

But the fiscal hawks didn’t realize it. At least, not until the reaction started coming in.

What will be interesting, now that the pushback against this plan is in full force, is how many of the fiscal hawks will stand strong for this plan and how many will run for the hills.

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