Every year, the oil refiner Motiva Enterprises writes a check for $6.6 million to St. James Parish.
A couple of months later, the state of Louisiana sends the company a full refund.
This messy system was created a generation ago in order to wipe away an obscure property tax that is assessed by parish governments against “business inventory” held by companies in Louisiana. In the case of Motiva, a joint venture between oil giants Shell and Aramco, the huge tax bill from local government is mostly a function of the oil stored at its refinery in Convent.
While many, if not most, Louisianians probably have never heard of the business inventory tax, it’s a big deal for some businesses, as well as some parishes. In industry-heavy St. James Parish, it accounts for nearly half the property tax base and about 17 percent of all tax collections.
The tax also comes at a huge cost to the state, one that is growing rapidly. Louisiana’s inventory tax refund program, approved by the Legislature in 1991, is responsible for a massive hole in the state’s budget that totaled $427 million last year. And the number is growing rapidly: After years of relative stability, the cost of the refunds has shot up by 120 percent over the last seven years, raising questions about whether the refund system is being gamed by businesses. The state does little to ensure that it’s not.
Robert Travis Scott, of the nonpartisan Public Affairs Research Council, which is studying the issue, expects the cost to the state to swell to $600 million in the next couple of years thanks to a slew of new industrial projects. It’s a “pretty much invisible problem” but one that needs to be dealt with, he says.
“It’s huge and it’s getting huger,” Scott says. “And that really is the problem. Where’s the lid on this thing?”
But local government depends on the money, and taking it away would mean either higher property taxes or less law enforcement, road maintenance, mosquito abatement and other services, says James Laurent Jr., assessor for Pointe Coupee Parish and incoming president of the Louisiana Assessors Association.
“I see where the state is trying to find a way that they don’t have to reimburse those businesses any more, and I understand that, but it has to be something equitable,” Laurent said. “We keep giving more and more exemptions all the time, and our tax base dries up. These revenues are vital to operating a parish from the police jury down to the sheriff down to the libraries.”
The inventory tax is unique — and according to Scott and others, poorly designed — in that the tax is assessed and paid at the local level. But the state is on the hook for the refund. So state taxpayers are subsidizing local ones, which might not matter were the benefits distributed equally.
But they’re not — far from it. State records show that an outsized proportion of the tax is paid in parishes in Louisiana’s industrial areas: primarily southwest Louisiana and the petrochemical corridor between Baton Rouge and New Orleans. The refund system allows those parishes — which tend to have healthier tax bases — to benefit at the expense of those that don’t have much industry.
In St. James Parish, for instance, the inventory tax generated roughly $1,115 per capita last year, an analysis by The Advocate found. In St. Helena, which also happens to be one of Louisiana’s poorest parishes, the tax brought in less than one-hundredth as much: about $11 per head. Because the burden of the refund is shared by all Louisiana taxpayers, the effect is that residents of St. Helena are subsidizing parish government in St. James.
“Usually when the state becomes the middleman, such as with school funding, it is to smooth out the disparities among the parishes in local wealth and revenue sources,” Scott said. “But in this case, it’s doing the opposite.”
While the inventory tax is paid by all businesses, it, too, is unequally distributed, with a few industries and businesses owing the bulk of it — and thus benefiting the most from the break.
Many of the biggest bills, and thus refunds, go to oil companies and other large manufacturers.
For instance, in East Baton Rouge Parish, which has the largest inventory tax roll of any parish, one-third of the inventory tax is paid by one company: Exxon Mobil Corp., which owed $13.5 million last year for its refinery and chemical and plastics plants. The next-biggest inventory taxpayer in the parish, the paper producer Georgia Pacific, paid less than $2 million, records show.
Apart from large manufacturers, major payers of the inventory tax include car dealerships and big retailers; Wal-Mart, for instance, has the third-largest bill in East Baton Rouge Parish.
Similar patterns hold true in other parishes with major petrochemical activity.
While multinational behemoths like Exxon Mobil appear to benefit the most from having the tax burden refunded by the state, many small businesses also enjoy the break. About 11,000 people and businesses sought refunds in the 2012 tax year, according to the state Department of Revenue — about one for every 16 corporate tax returns filed.
That includes people like Cliff Boulden, for instance, who was surprised to learn from an Advocate reporter that he has been paying a few thousand dollars in inventory taxes every year for his Bet-R-grocery.
His accountant, Marvin Owens, explained to him that every year, he sends a check to East Baton Rouge Parish and then gets reimbursed by the state.
The whole process takes only a few minutes.
“I never understood why it’s there,” Owens said.
Though refiners appear to be the biggest beneficiaries of the rebate, the state doesn’t track the payments or the refunds in any systematic way. To break it down by industry sector would require reviewing the tax roll of each of the 64 parishes, a task that apparently has never been attempted.
“The big guys are paying the lion’s share of it, but the family dollar stores, the jewelry stores … they all feel it as well,” said Chris Guerin, chief deputy assessor in West Baton Rouge Parish. “It affects not only the large taxpayers but also the mom-and-pop guys.”
A roundabout fix
Louisiana arrived at the rebate system in a roundabout way. The inventory tax dates to the 1800s. As with most other property taxes in Louisiana, the law requires assessors to appraise inventory at 15 percent of fair market value; the resulting figure is then multiplied by the locally set millage rate.
In the late 1980s, lawmakers began talking about getting rid of the tax or scaling it back. It was widely viewed as a tax that put Louisiana at a disadvantage compared with other states, most of which had by then abolished the tax.
In particular, the inventory tax was seen as hurting Louisiana’s chances of attracting distribution centers. Initially, legislators floated a plan that would have exempted those businesses only from the tax through a constitutional amendment, but voters rejected that idea in a 1990 referendum.
The next year, the Legislature on its own passed a plan to phase out the tax for all businesses, in increments of 20 percent a year. Because they couldn’t get rid of the tax without a constitutional amendment — and because local governments were howling about the damage its loss would do to their budgets — the plan called for businesses to go on paying the tax locally and then to get a refund from the state.
That system put the state in the awkward position of having no say or control over the size of the bill it gets each year. And it could give local assessors an incentive to overappraise inventory — or assess property as inventory rather than in another category, such as movable property — knowing companies don’t really mind paying it because of the refund.
“The local governments have both the control and the levers on how much that tax is going to be,” Scott said. “So there’s this perverse incentive set up to increase the tax knowing that the people being taxed, namely the companies, aren’t really paying the tax, but the state is, so it’s become a sort of unlimited account.”
If there’s no hard evidence that businesses are taking advantage of the refund system, there’s also little being done to ensure that they’re not — and the growth in inventory being taxed has far outpaced Louisiana’s economic expansion.
The state makes only a cursory effort to determine if the tax is being uniformly assessed around the state, or that businesses are not counting items as inventory that actually belong in a different tax category, one that does not qualify for a refund.
Charles Abels, administrator of the Louisiana Tax Commission, which is charged with ensuring valuations are done consistently in every parish, said inventory is generally self-reported by businesses. The commission does random audits on specific businesses “every year or so,” and they have generally found “that inventory is reported correctly in most cases.”
But the commission typically audits the inventory of only about five businesses a year, Abels said. More than 160,000 Louisiana businesses filed taxes last year, and more than 10,000 claimed inventory tax rebates, according to the Department of Revenue.
“What’s happened over time, I think, is that companies have said, ‘OK, everything we have is inventory, if at some point we can resell it — so put my furniture, put my equipment, all this is inventory. And then you can assess it however you want, and we can get that money back.’ There are ways to potentially game that system,” said LSU economics professor Jim Richardson, who has studied Louisiana tax law for decades and is working on a new analysis for the Legislature, due this spring.
“I think they’ve stretched the definition of inventory to a very far extent. You can’t accuse them of conspiring or anything. But you can see how good tax attorneys and good tax accountants can figure out, ‘How do I maximize the utility of this particular provision of the tax law?’ ”
When the inventory tax refund program was passed, officials predicted the state would actually see a net gain in tax receipts thanks to job growth in wholesale trade and distribution centers that would locate here.
But those predictions don’t seem to have panned out. The state has gained a handful of distribution centers, but the number of wholesale trade jobs in Louisiana has actually fallen by 5 percent since 1998, the year after the break took full effect, according to federal employment data.
Whether it’s had a generally positive effect on the state’s business climate is harder to measure. But the awkward workaround invented by the Legislature — leaving the tax on the books and then granting a refund — hurts Louisiana in various surveys that compare the tax climate of the 50 states, according to an analysis by Gov. Bobby Jindal’s Department of Economic Development. Just 14 states, including Louisiana, have an inventory tax on the books, according to a 2012 study by the Tax Foundation.
Even if the refund program is poorly designed and failed to attract the industry it was aimed at, there’s little enthusiasm for abolishing it.
Shortly after the phaseout of the tax began, then-Gov. Edwin Edwards proposed bringing the tax back, along with some other tax increases. His plan went nowhere. And in 1999, then-U.S. Rep. William Jefferson proposed a repeal of the rebate as part of his failed gubernatorial campaign.
A hole in the 2000 budget gave that idea new life during the legislative session that year, with then-Gov. Mike Foster backing a 50 percent reduction in the rebate. But business leaders objected, and lawmakers opted instead to increase by 1 cent the sales tax on food and utilities. That tax, widely criticized as regressive, was later abolished.
Over the past decade, with inventory tax refunds growing at a much faster rate than the economy, the idea hasn’t really resurfaced. And while there is increasing concern about the state budget being bled dry by such rebate programs, even those sounding the alarm aren’t calling for a return to the old days.
“There shouldn’t be an inventory tax in the first place — there just shouldn’t be one,” said Scott, whose organization strongly supported the creation of the refund program two decades ago. “In terms of trying to be competitive, it’s not a good tax. It’s very subject to being unequally applied in different parishes. There’s a lot about it that’s not a good tax.”
Richardson has a similar view. Simply getting rid of the tax, which might seem like the ideal solution, would create major havoc for the parishes that now rely heavily on it.
“That’s not going to be politically acceptable,” Richardson said. “So we have to find some other alternative.”
The inventory tax provides about 11 percent of all property tax collected in Louisiana. But in industry-rich parishes, the number is far higher.
In St. James Parish, for instance, 42 percent of property taxes come from inventory; in St. John the Baptist Parish, the number is 40 percent; and in West Baton Rouge Parish, it’s 28 percent. In all of those parishes, the inventory tax provides 10 percent or more of total revenue for local government.
Getting rid of the inventory tax “would do away with our tax base,” West Baton Rouge Parish Assessor Barney “Frog” Altazan said. “It’s how I get the money for the sheriff, for patrol units, for road repairs.”
Coming up with a way to protect the state’s interest without hurting local governments — and without restoring the tax — is easier said than done, Scott said. Among the ideas PAR is looking at: trying to rein in the growth of the refund program by freezing it at current levels or finding “a more stable transfer of wealth from the state to the locals,” such as sharing in state sales taxes.
“I say probably the only solution is to try and fix the growth part of this, and try to make sure it’s not going to grow and keep eating away at the budget,” Scott said. “And by doing that, you’d have to have some sort of transfer of wealth from the state to the local government. Which we’re already doing. But the idea would be to transfer wealth to the locals that isn’t on the same growth pattern as this.”
Mark Ballard, of the Capitol news bureau, contributed to this report. Follow Gordon Russell on Twitter, @gordonrussell1.