The Industrial Tax Exemption Program (ITEP) has been hotly debated lately. As a 15-year veteran of Louisiana economic development policy, I want to turn down the heat and focus on the serious questions of how and why public policies help grow prosperity for individuals and communities.
To effectively expand the economy in a competitive environment, governments across the country use incentive programs designed to encourage activities that benefit citizens and nourish local and state economic health. Incentives should be used sparingly, when necessary to compete for jobs and investment.
Incentives are not “giveaways,” nor are they limited to businesses. They’re simply tools public bodies use to influence behavior. To discourage certain behaviors, public bodies place higher taxes on them. Think about how high taxes are on cigarettes, for instance. And to encourage certain behaviors, public bodies exempt taxes from them — Louisiana’s homestead exemption is a good, if expensive, example.
ITEP works similarly. Louisiana constitutionally incentivizes capital-intensive building, modernization, and job creation, offering manufacturing companies a property tax abatement of up to 100 percent for qualifying capital investment. In 2016, Gov. John Bel Edwards issued an executive order requiring local approval for these contracts and limiting abatements to no more than eight years.
Before this executive order, most local elected officials never contemplated their role in ITEP; their roles in economic development focused on things like infrastructure, blight, and workforce training. While the governor rightly ensured that local public bodies have a say in whether ITEP is used in their communities, his executive order provided no guidance as to how to analyze manufacturing projects seeking ITEP.
So what? Well, this lack of guidance left a void into which harmful business-versus-the-people rhetoric has been poured, stalling our economic engine.
A serious question is missing from the long list of questions asked by ITEP’s detractors. It’s the question our organization, the Baton Rouge Area Chamber, asks in guiding use of any economic development incentive: what is the incentivized project’s net return on investment to the community? If the project creates economic activity enough to generate a net positive return in increased tax revenue, the community will be objectively richer with the project than without.
BRAC also weighs other considerations that further add to ITEP’s value. These include prioritizing small business expansion, appropriately valuing capital expenditures, encouraging manufacturers to remain competitive by keeping their equipment from growing unusable or outdated, and recognizing that manufacturing projects are beneficial because they both create jobs and contribute tax revenue to the public coffers.
Most vitally, for any incentive to be effective, it must be predictable and freed from whim, political corruption, individual biases, moods, and personal preferences. When conducting financial planning, businesses view unreliable incentives as akin to no incentives. The effect of unreliability on our competitiveness is vastly destructive.
In East Baton Rouge Parish, local taxing authorities will consider ITEP applications as a body, fostering consistency across all authorities. This is a huge first step toward creating a predictable process. I hope this local collaboration leads to defined and objective approval standards based on jobs or investment amount, an opportunity for public comment on such standards, and limitations to how often they can be changed. Such guidelines will prevent politicization of the incentive and clearly lay out the economic development priorities of the community.
Economic development organizations like BRAC work with public bodies to accelerate economic and community prosperity through business partnerships. We hope that by offering guidance to the communities we strive to nurture, we can cut through the rhetoric and get us all focused on the serious business of cooperating for the common good.
Adam Knapp is president and CEO of the Baton Rouge Area Chamber.