SADOW: An Overhaul And Reduction Of Louisiana’s Business Tax Breaks Is In Order

The excellent series on the value brought by tax exceptions continues in the Baton Rouge Advocate with a piece on property tax exemptions and payments for job creations by large firms, complementing earlier information about enterprise zones. Together, they point the way to needed reforms of these jobs credit programs.

Large projects either may qualify for money doled out by the state on a case-by-case basis that could include money up front but also requires performance standards on metrics such as money spent and jobs created by the employer, or qualify for rebates or exemptions through programs built in state law. In the case of the former, the state can claw back money if the targets aren’t met.

Enterprise zones spending constitutes a tax rebate for employers that expand their workforces by at least 10 percent by having 35 percent of those hires living in a zone judged as distressed economically by the state using metrics such as high unemployment rates, low income levels, and the number of residents living below the poverty level; or if they received public assistance; or if they lacked basic skills; or if they were “unemployable by traditional standards” because they lacked training, had a criminal record, or were physically challenged. Previously, the law stated only that an employer locate in a zone.

That change has sparked controversy because it means many firms qualify that are located not just outside of the zones, but even in areas doing well economically. Further, many are in retail and represent large corporate chains. Retail activities tend to churn money but don’t produce value-added products that are key to economic growth, and with large operators involved it’s unlikely that siting decisions in these non-distressed areas would have been any different without these kinds of incentives.

Direct economic development funding also has its problems, chiefly in that it often constitutes little more than a bribe pursuant to a bidding war with other states to get a firm to locate or to continue operations in the state. Instead of paying to get the private sector to come, as if to make up for an inherent blemish, it would be more economically efficient to lower taxes across the board to make the place friendlier to begin with. Why collect taxes just to give the proceeds away and hope some comes back to the community instead of not collecting them in the first place and letting the community keep them?

The argument that Secretary of Economic Development Stephen Moret makes on this account, congruent to the underlying theory that states need to engage in this shuffling of resources, is that Louisiana’s historical underdevelopment requires a kind of “shock therapy” to jumpstart it and catch it up to other states. This view held great currency in the past couple of decades in the state and led to creation of specialized funds such as the Mega-Project Development Fund, into which in the past the state dumped hundreds of millions of dollars to court companies, and the Rapid Response Fund, which doles out smaller amounts but in a much quicker fashion when quick but less consequential decisions need be made.

But fiscal stresses exacerbated by the economic non-recovery of Pres.Barack Obama’s policy-making by 2011 led the state to abstain from refilling the MPDF, leaving less than a fifth of it to remain compared to its height, and almost all of that taken since either went for other LED projects including the RRF or to fund other budget items. It now contains about a hundredth of what it did, with no signs from legislators they intend to replenish it in any amount any time soon.

Which is as it should be. As tenuous as the “shock therapy” argument is, it’s now a moot point. Despite ill national economic winds, Louisiana has bucked the tide over the last several years in employment by bringing its unemployment rate down typically to no worse, if often much better, than the national rate, its number of jobs continues to climb to historic highs, and in the last decade its per capita income has increased substantially both in dollar and comparative terms, now up the 29th among the states. Continuing gains in secondary areas, such as in educational attainment, also signal that, if there ever was, there is now no longer any need for shock therapy by way of these kinds of incentives. There may be a case for a small RRF, but the MPDF should have its balance transferred there and closed.

Exceptions based upon enterprise zones also need rethinking. The original concept that gained prominence through the Pres. Ronald Reagan Administration held that the break should stimulate development in a geographical area, particularly where there was little else but low-income housing. The idea was to create jobs that could attract labor within the area and to provide services needed in the area, such as grocery stores, gas stations, and other basic necessities, with any other kinds of commercial or industrial job providers as lagniappe.

To achieve this, the law should be changed to disallow retail outlets from qualifying for these credits except where they are located physically in an enterprise zone. This better balances the goals attracting higher value, thus greater generators of tax revenue, jobs, of encouraging the hiring of those in less-advantageous situations, and providing incentives to locate businesses in areas where these individuals disproportionately live.

Such breaks aren’t entirely useless, but must be evaluated by asking the right questions. It’s not that they make a significant difference in siting decisions, for at the margins they surely do even as other factors government policy cannot control directly loom far bigger in importance. It’s that they provide at least one cent more in incremental tax revenue over expenditures for their funding. Chances are the enterprise zone program, if resituated closer to its original intent, can do that, while direct funding may meet this cost-effective standard in certain cases, but probably the state has been too lax in too many instances (with perhaps ponying up to keep low-wage, low-skill food processing jobs in the state its ebb).

The latter program in effect would be neutered by not refilling the MDPF. Fixing the former will require courage from the Legislature – always in short supply during election years as is 2015, leaving 2017 constitutionally this next time the program could be rebalanced in a regular session of the Legislature – and from the governor – who if the wait must be until 2017 will not be term-limited Gov. Bobby Jindal. Best would be if Jindal would stump for these programmatic changes for this year, but in all likelihood the best that can be done is to query his potential successors on the campaign trail to secure commitments from them if elected to make these necessary alterations.

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