As state lawmakers prepare for a special legislative session early next year to tackle budget shortfalls and possibly rein in Louisiana’s vast array of tax giveaways, a nonprofit public-policy group is warning that the sudden and unexpected revenue shortfalls such breaks often create can be partly avoided by monitoring costs and designing incentives that have controllable and predictable payouts.
Released Tuesday by the Pew Charitable Trusts, the report outlined two basic strategies to avoid getting caught off-guard by incentive costs that in some cases have ballooned by tens or hundreds of millions of dollars: Regularly forecast and monitor the costs of commitments, and cap and control how much such programs can cost the state each year.
The report, which relied on state records, media reports and interviews with dozens of government officials and experts from 20 states, comes two months before Gov.-elect John Bel Edwards is expected to call a special legislative session to review most aspects of the state budget, including tax incentives for business and industry.
Though it wasn’t addressed in the Pew report, perhaps Louisiana’s most obvious example of an incentive that grew far beyond expectations is the state’s break for renewable energy systems, the most generous subsidy of its kind in the U.S. The break has cost taxpayers at least $150 million since 2008. In 2013, it cost about 122 times the highest estimate forecast for the measure when it was conceived in 2007.
That break is being phased out, but others that also have grown much faster than anticipated remain in place.
Amid fiscal belt-tightening, tax breaks aimed at spurring economic development have gotten a closer look by some fiscal watchdogs and other observers. Among the questions they often raise: Was the taxpayer subsidy key to landing the investment? And was the subsidy so large that the costs to the state were bigger than the benefits?
While using such tax incentives is common practice among states, the report notes, the key is designing and awarding them effectively without sending a state’s revenue forecast into a tailspin.
The Pew report credited Louisiana lawmakers with taking steps during the 2015 legislative session to adopt some variation of the safeguards that the report suggests. Among the changes made this year: a cap on the amount of film-production tax credits the state can give out during the year and limits on the refundability of inventory taxes.
“Louisiana is taking some first steps to move in that direction,” said Josh Goodman, a senior researcher at Pew Charitable Trusts. “What we’re seeing across the country is really sort of an inconsistent process in most states.”
Among Louisiana’s various business tax incentives, Pew’s report zeros in on a nearly 20-year-old break once intended to spur horizontal drilling for oil and gas, one of a handful of incentives that were highlighted in “Giving Away Louisiana,” an eight-part series on state tax giveaways published last year by The Advocate.
This year, a legislative audit found that from 1994 to 2007, just 393 horizontal wells were put into production and approved for the tax credit. But over the next seven years, as the once-exotic technology grew commonplace and Louisiana’s Haynesville Shale gas field began producing, the number jumped about sevenfold, with a total of 2,797 horizontal wells approved for the credit.
Under the credit’s rules, energy producers are refunded the severance taxes on horizontal oil or gas wells for the first two years of production or until the well has paid for itself, whichever comes first. On average, drilling a horizontal well costs about $9 million.
The legislative audit noted that no other state with significant horizontal-drilling operations offered a full refund of so-called severance taxes — though some offer reduced rates.
As the use of the break exploded, so, too, did the state’s cost — from $3 million in 2005 to a high of $272 million in 2012. It cost $166 million in 2014 as drilling slowed, the report said.
Incentive programs elsewhere throughout the country have caused lawmakers headaches. Months into the 2015 budget, Michigan lawmakers faced a gap of hundreds of millions of dollars after the cost of one of that state’s tax incentives ballooned much higher than expected. To close the hole, the lawmakers relied on spending cuts, according to the Pew report, which predicts that the incentive will continue to cost billions more in coming years, with much of the money tied to long-term incentive deals for the once-struggling auto industry.
In Michigan, that incentive’s cost grew from $4.9 billion in 2011 to $9.4 billion in 2015, according to the report.
But the Pew report wasn’t all doom and gloom: Louisiana’s and Michigan’s incentive programs “contributed to fiscal challenges,” the report said, “but at least the desired economic activities were increasing quickly along with the costs.”
Alternatively, in New York, a tax credit intended to promote cleanup and development of contaminated sites cost more than $500 million in 2013, earning the distinction of being the state’s costliest business tax break.
But one reason the program’s costs have ballooned is that the state has awarded credits to projects that weren’t aligned with the incentive’s environmental goals, including a hotel project that garnered more than $100 million in credits without involving any environmental remediation benefits. This year, state lawmakers revised the program to tie the award’s size to the level of remediation.
The Pew report doesn’t attempt to evaluate several key questions, such as the effectiveness of one state’s approach over another, whether the breaks actually spurred new development or how well Louisiana has insulated itself from rising costs compared with other states.
But it does credit Louisiana lawmakers with taking a few steps to guard against unforeseen costs, including this year, when legislators passed a law requiring that state revenue forecasters project the costs of tax incentives.
The report quoted the legislation’s sponsor, state Sen. Jack Donahue, chairman of the Finance Committee, as saying that the new approach will help lawmakers better grasp how tax breaks affect the budget.
“I understand the business perspective of incentives and their value,” Donahue said, according to the report. “I’ve been a businessman for a long time. But there are also priorities of state to be careful of, like education and roads. So we need to keep better track of (tax incentives).”
As they stared down a $1.6 billion budget shortfall during the 2015 legislative session, lawmakers moved to eliminate or limit refunds tied to several of the state’s major incentives. Those moves were expected to boost revenue by $129 million in the first year and $735 million over five years.
Goodman, the Pew researcher, said it will take time to evaluate the state’s long-term success in blunting the incentives’ unexpected growth.
“Some of these things, like the new legislation to forecast the cost of the incentives, are brand new, and how it’s implemented will affect how effective it is with helping to grasp these challenges,” he said.
Follow Richard Thompson on Twitter, @rthompsonMSY.