Thirty years ago, Louisiana was enmeshed in a smothering economic downturn. The collapse of oil and gas prices devoured prosperity in the Bayou State. I worked at the Lafayette Chamber of Commerce when the crash hit. Almost overnight, the energy investments that fueled the boom dried up and precipitated the bust that followed.
Lafayette in the boom of the ’80s was an amazing place. Along U.S. 90 from Scott to New Iberia, there seemed to be an endless number of oilfield companies constantly opening and expanding. Then the neutron bomb of depressed prices made that stretch of highway an economic ghost town. Drilling pipe, oil tools, rigs and other essential elements of the industry were stacked and practically abandoned since there was no market to lease, rent or sell them. Those companies saw their profits disappear — along with employees they could no longer afford to keep. Since the vast majority of those companies no longer had positive net income, they paid no income taxes. But every one of them was forced to pay ad valorem inventory taxes on the zombie equipment rusting in those yards.
That was my introduction to the dark side of the inventory tax.
Ed Steimel hired me in 1986 to be director of LABI’s Taxation Council. I was no tax expert, but Steimel was. I had many discussions with him about tax reforms that would enhance economic development in Louisiana. He believed the business community should not simply ask to have its taxes lowered. It should document areas in the tax code where Louisiana was at a competitive disadvantage with other states and seek to remove those impediments in ways least harmful to state finances.
I succeeded Steimel as LABI president in 1989 and continued the pursuit of that agenda. The list of primary tax reform items was not lengthy: repealing the inventory tax, removing debt from the base of the corporate franchise tax and eliminating the state sales tax on manufacturing equipment. Very few states imposed those taxes, especially our competitors in the South. Taxing borrowed investment capital via the franchise tax was an incredibly dumb idea as was the imposition of a sales tax on manufacturing machinery and equipment. When the inventory tax was added in, states like Texas were clobbering Louisiana in the competition for large-investment, high-wage industries.
In 1990, the Legislature, by an overwhelming margin, passed a refundable tax credit against state taxes for the local inventory taxes paid by all businesses. The inventory tax is a property tax, and only local governments levy property taxes in Louisiana. The refundable credit allowed the de facto elimination of the inventory tax without impacting local government revenues.
The credit was phased in over a number of years to lessen the impact on state finances. In 2004, at Gov. Kathleen Blanco’s urging, the Legislature by an overwhelming margin voted to phase out the debt portion of the corporate franchise tax and the sales tax on manufacturing equipment.
As the phaseout of those three taxes advanced, the manufacturing, distribution and construction sectors of the economy expanded significantly.
Major industrial expansions worth billions of dollars have been announced recently. The cost estimates used for those location and expansion plans were based on no net inventory taxes being owed. It will be interesting to see what impact the reimposition of a significant portion of the inventory tax will have on industrial investment in Louisiana going forward — particularly if any additional business tax increases are enacted when the Legislature meets again to fix the bogus budget it recently passed.
The term “corporate welfare” appeared often during the legislative session. There is some corporate welfare in the budget. Interestingly, the Legislature did little to address it. But there is a big difference between “corporate welfare” and keeping Louisiana businesses competitive in the national tax arena.
Calling competitive business tax adjustments “welfare” may help a governor seeking to camouflage tax increases and legislators looking to justify their tax increase votes. But it doesn’t square with reality — and it doesn’t send a reassuring message to the companies that have announced plans to spend billions of their shareholders’ dollars in a state where Huey Long’s fiscal policies are making a comeback.
Dan Juneau is the former president of the Louisiana Association of Business and Industry.