It appears that the New Orleans City Council may be planning to place politically-motivated restrictions on the Industrial Tax Exemption Program, or ITEP. A win for the Together Louisiana socialists, but a big loss for a city that more than anything else desperately needs all the tools it can get to create a viable economy.
Let’s start by understanding why ITEP is so important to economic development. It’s not a complicated question; when a business decides whether it wants to expand or to in-migrate to a region it looks at all the factors that will allow it to fulfill its basic function, to make a profit and to keep as much as it can for its shareholders.
To put it frankly, Louisiana and many of its cities fail miserably when measured against other locations and states. A poorly-educated workforce, high litigation and insurance costs, poor infrastructure, a tax structure that places most burdens on businesses.… you name it and we are near the bottom of metrics when compared to most locales.
Many years ago, after it became clear that state politicians lacked the political courage to be able to correct the fundamental problems that cause Louisiana to be so unattractive, they took the easy way out and came up with the ITEP program. In effect ITEP is an effort to equalize the cost penalty that a business has to incur to be in Louisiana by granting a temporary exemption on local property taxes. ITEP was originally set up as an initiative emanating from the state government, through Louisiana Economic Development. But Gov. John Bel Edwards changed the rules for the program, essentially downloading approval for ITEP incentives to local governments. That’s why you’ve heard so much controversy in the last couple of years over a program you’d never seen in the headlines before.
The goal of the ITEP program is to induce industry to relocate to or expand in a locale by granting a short-term property tax exemption. After what was a 10-year and is now an 8-year exemption period the locale starts once again to collect taxes on the property. In exchange for a time-limited tax exemption industry upgrades or builds permanent facilities that usually generate jobs and, once the exemption period expires, taxes for a long time. Also, the locale gets sales/use taxes and taxes from employees and supporting businesses during that 8-year exempt period, so the loss of property taxes is somewhat mitigated. Finally, ITEP helps keep marginal facilities in Louisiana by allowing for what would otherwise be unprofitable upgrades.
When a locale cuts off the availability of ITEP or, as proposed in New Orleans, mandates unfriendly and costly politically-based restrictions in order to qualify for it, the applying businesses will do the math; they will ask themselves what is the cost penalty for being here versus what would it cost to be somewhere else. With few exceptions that calculation will always demonstrate that without the ITEP offset, locating somewhere else will be more profitable.
So, what is the downside for New Orleans? Well, without an aggressive effort to overcome a bad business climate the future is not bright. The Bureau of Economic Analysis published its regional GDP growth data and New Orleans has seen a decline of -0.2% and -0.9% over the last two reporting years; this during a time when the US economy was exploding. New Orleans is simply being overlooked.
Perhaps a more subtle, long-term symptom of economic malaise in New Orleans is the conversion of commercial office space to other uses. In the mid-20th century New Orleans was a truly vibrant commercial hub and numerous office buildings were constructed to support that vibrancy. In the last 30- or 40-years corporate business has slowly deserted the city creating a huge vacuum of now obsolete commercial space. The oil and gas business is virtually gone and with it all the local support services, the major bank headquarters are gone, the international trade sector is gone…the list is long.
Out of necessity, property owners have converted large numbers of buildings to hotels, condominiums, or apartments. What was once the Central Business District and the Warehouse District are now largely out of commerce and have become residential areas in a yet-to-be-proven effort by property owners to gain something from their investment. The question that must be asked, with a declining business base who will be able afford to live in all these new condos?
What has caused business to desert the Big Easy? Well to a great extent it is because business has reacted to all those bad metrics and to better opportunity elsewhere by voting with its feet. Large numbers of businesses have moved, merged, or closed and little else has taken their place.
Further exacerbating the problem has been city government dominated by left leaning political leadership that looked to the business sector as if it just had to be here and that operated on a philosophy that business owed it to the city to pay for a growing public sector, a form of share-the-wealth perhaps. Over the years that same leadership has failed to properly manage and finance the most basic functions of any city; police and fire, streets, utilities, drainage, etc. Today the city of New Orleans is literally in shambles.
A new mayor and council have taken over and they seem to be paying attention to that sad state of affairs but at the same time they run the risk of squelching future economic growth by not opening the City’s arms to business. A poignant example of the latter is the political move to effectively gut ITEP in New Orleans.
New Orleans is a poor city, getting poorer. Louisiana has never lived up to its potential. There is the critical fact of life that somehow the leaders of Louisiana and New Orleans just don’t get. Nothing will ever break the cycle of poverty and nothing will ever bring prosperity except a strong business climate that produces decent paying jobs. NOTHING!
When government introduces social engineering driven by left-wing activists and looks to business to pay for it, business runs, not walks, away as fast as it can. Need proof? Just look at the economic history of New Orleans over the last 40 years.
Now let me make something very clear. I despise that we need giveaway programs such as ITEP. I despise that we pour taxpayer money into a desperate race to lure business to a state that should be a Mecca for business. I despise crony capitalism. But what I despise more than all of that is that the state and the City do not have the courage to address the fundamental defects in government policies that make programs like ITEP indispensable. After all it is leadership that freely chooses to keep economically unstable political policies in place, but it is the people that pay dearly for the folly of it.
So, my message to the governor, to the mayor, to the legislature, and to the council; the answer is not to play politics with ITEP. The answer is to fix the state and the City. If the goal is to truly help the poor then quit making excuses in order to keep in place the abhorrent policies that depress a state rich in assets and a city that was once the Queen City of the South.
The people need better paying jobs; jobs that come from business, not government. Stop playing with people’s lives by just expanding government to cover up for a failure to address serious policy defects. The answer is not to create an adversarial relationship between the people and business for political gain; it is to create a growing economy that will do amazing things for the people. And when the people do better the most intriguing thing will happen, suddenly government revenues will grow dramatically in response to all that enhanced prosperity.
Other places have done it, we can too, but first we must want to!