A recent empirical study found that Louisiana’s Industrial Tax Exemption Program (ITEP) offers little benefit to the state and its residents.

“Giving Away the Future: How Louisiana’s ITEP Has Failed to Produce Prosperity” was published earlier this week by the Ohio River Valley Institute (ORVI) — an independent, nonprofit research and communication center founded four years ago. On Monday, ORVI presented the data in a webinar.

Ben Hunkler, communications manager for ORVI, said the group took a “critical” look at Louisiana’s ITEP program, and analyzed its overall effectiveness with the “most rigorous economic and statistical analysis of the program to date using actual jobs and income data.”

The author of the study, Nick Messenger, economist and senior researcher at ORVI, said their research is primarily focused on sustainable economic development. While they most often study development in communities of Appalachia, the connection between attempts to bring petrochemical and plastics industry to that area and the presence of industry on the Gulf Coast brought the ITEP to their attention.

ORVI wanted to analyze the way tax incentives bring “momentum” to industry.

“We wanted to ask the question, ‘Does this work? Is this an effective strategy?’ We haven’t seen this work very well in our parts of the country and that is what brought me down to explore what is perhaps the largest tax exemption program in the country.”

Messenger said that as an empirical study, the publication does not “cherry-pick” certain ITEP-qualified projects in the state. ITEP data was collected from the Louisiana Economic Development Fastlane Database, the Quarterly Census of Employment and Wages, the U.S. Bureau of Economic Analysis and the Census Bureau. Using this data, a model was built to determine correlations between ITEP exemptions per parish and job and income growth.

ITEP

ITEP is one of the nation’s largest corporate tax subsidy programs and has exempted more than $20 billion in local tax revenue since its inception.

The program was instituted in 1936 to compete with other state’s tax exemption programs, and provided corporate manufacturing with local tax exemptions of 100 percent and no jobs requirement. A 2016 reform conducted under the administration of former Gov. John Bel Edwards reduced that exemption to 80 percent, added a job-creation requirement and instituted a local process in which major taxing bodies each approved an ITEP application individually.

Last week, Gov. Jeff Landry signed an executive order that removed the job requirement and changed the local approval process for ITEP applications; instead of each governing body approving or denying an application individually, a consolidated parish industrial board will be created.

Erin Hansen with Together Louisiana — one of the largest grassroots organizations in Louisiana that works on issues such as tax fairness, workforce development and improving infrastructure — said during the webinar that the consolidated board will likely be composed of the representatives from the three major taxing bodies. If the ITEP’s development is within a municipality, the mayor will be given a seat on the board, as well.

The executive order also allows the governor to approve an ITEP without a local tax authority vote.

Messenger said research shows the local approval process that Landry has axed had improved the condition of the ITEP program by allowing a significant amount of money to be invested back into local government services. While the 2016 reform was a step in the right direction, Landry’s decision was in “the completely wrong direction,” he said.

“The state has bet for 88 years that the next business that gets the ITEP will be the thing that really kickstarts an economic turnaround in the state. I don’t know that I would go to a casino and bet 88 times in a row and lose 88 times in a row and think that I should go an 89th time.”

Findings

The study had multiple key findings, some of which are that the amount of dollars exempted by ITEP has no statistically significant relationship to job growth or personal income growth. Messenger said the research found parishes with the most job growth and rising incomes actually had the lowest ITEP utilization. These conclusions mean “the wider economic benefits of ITEP are overstated, relying on inflated and unsubstantiated indirect and induced job claims.”

“What you see is that maybe ITEP isn’t the big harbinger of job growth and income growth that the state has projected it to be in the past.”

At the core of a tax exemption program’s philosophy is that if taxpayers exempt dollars that would otherwise be put towards infrastructure, schools, health care, sheriff’s offices, etc., a positive return on investment (ROI) should be seen. The ITEP was created with this mission and is expected to prompt job growth and income growth in the state, but the data shows the intended positive ROI has not occurred.

“The bottom line of our study is really that if you build it, they don’t always come, even in the cases where they do come, they don’t necessarily benefit Louisiana residents. If you’ve abated $20 million in the last 25 years, and more if you go all the way back to 1936 … you would hope for a better return than being dead last, or close to it.”

In 2023, Louisiana was ranked 50th in both overall ranking and overall economy. Additionally, the state dropped five spots from 39th to 44th in personal income per capita after the ITEP was instituted 80 years ago relative to every other state that has used similar programs.

Prior to ITEP, personal income per capita was 14 percent higher than other states in the Southeast region. In 2022, personal income per capita was 7.3 percent slower than the southeast region despite slower population growth.

“When you have income per capita, you can change income or you can change population. So, if the population boomed, maybe you could see that decline, but the raw population numbers suggest that the reason Louisiana lost ground is not because it grew people wise, but because it did not grow as fast income wise. “

The shortfall of ITEP is a symptom of a nationwide flaw in industry forecast models. These models consider job creation, but often don’t account for the negative impacts that industry can create. Messenger said the unwanted effects can include increased healthcare expenses, lower property values and increased monitoring, legal and cleanup costs for air and water pollution.

“It’s really an all-gravy forecast. If you build it, they’ll come and it’s going to be magical. Unfortunately, if you don’t consider any of the possible negatives, you can’t get a negative answer.”

The study also found the state’s economy is too reliant on the petrochemical industry, and that the gross domestic product (GDP) produced by petrochemical industries do not “translate into earnings for local workers.”

It also noted that the growth of the petrochemical industry in Louisiana has likely led to taxpayers’ indirect subsidization of the “destruction of their own environment and health.”

Recommendations

Effective tax exemption programs should have a type of clawback mechanism to penalize facilities that do not meet agreements included in the application, Messenger said.

“If the promise doesn’t materialize in some capacity, some amount of that money is returned to the community.”

Such a provision was included under the 2016 reform and has been utilized in Calcasieu Parish. For example, in January the Calcasieu Parish School Board penalized Indorama Ventures Olefins LLC. for failing to comply with ITEP requirements in 2022 by reducing their tax exemption to 40 percent for future years.

Landry’s executive order does not indicate that this clawback mechanism will be removed.

Messenger also stated that a “good tax exemption program” should be particular about what is subsidized and should consider natural resources and amenities that could be capitalized on. He said that ITEP could focus on what Louisiana already has “some sort of comparative advantage in doing,” such as the fishing industry and Gulf of Mexico tourism.

ORVI

ORVI was founded in 2020 with the intention of producing research on shared prosperity, clean energy and equitable civic structures.

Hunkler said that the work of the Institute “charts a course for shared prosperity, clean energy and more equitable civic structures in Appalachia and beyond.”

“Our research finds that generations of resource abstraction have hollowed out local economies and fossil fuel communities across the nation, hemorrhaging jobs and accelerating population decline. Our team of experts have demonstrated how transitioning to clean energy, prioritizing efficiency upgrades and deploying large-scale initiatives to clean up fossil fuel damage can uplift a holistic, place-based economic development model that improves quality of life, revitalizes economic and job growth and builds community-wide shared prosperity.”