CROSS-WISE: The State They Gave Away

by Pearson Cross

Legislators would be wise to admit today’s suffering is all on them.

As the contentious process of addressing a $1.6 billion dollar deficit drags into June, legislators would do well to remember that much of their suffering is self-inflicted. Reductions for health care, state agencies, higher education, museums and other state programs are largely the consequence of exemptions and tax cuts they passed, with the support and approval of the Jindal administration. In reducing revenue, legislators have acted on two related impulses: the desire to cut taxes and limit the growth of government and the desire to create a more business-friendly environment. However, as the current crisis makes clear, cutting taxes does not ipso facto produce more revenue, nor does a more business-friendly environment lead to a diminished need for services. While there may be short-term advantages to tax exemptions and rebate programs, over time they often fail to pay for themselves and become net losers, even as their supporters trumpet their value. This is the source of the troubled trajectory we see in many of Louisiana’s most costly tax exemption programs today, where diminished utility and rising costs are linked with a supportive and vocal client network. Together these forces have made tax exemptions difficult to alter or curb no matter how costly or ineffective they might be.

Gov. Bobby Jindal, an acolyte of Grover Norquist and Americans for Tax Reform, has contributed to the Legislature’s difficulty by threatening to veto any bill that adds revenue without an “offset” somewhere else, or even the entire budget if the final result is not “revenue neutral.” In Jindal’s view, prudent state management leads to a smaller, less expensive government, as well as a decline in the demand for services. Although the governor often speaks of “protecting” higher education and health care while “doing more with less,” in fact this assurance of protection is a sham. From its inception, the Jindal administration has blessed deep cuts for critical services, departments and agencies while spending freely on tax cuts and exemptions.

In its eight-part series titled “Giving Away Louisiana,” The Advocate analyzed six programs that, combined, dispense more than a billion dollars in tax incentives and exemptions annually. The six programs drawing the Advocate’s attention were film incentives ($250 million); inventory tax refunds ($427 million); solar power tax credits ($61 million); horizontal drilling exemptions ($240 million); enterprise zone programs ($70 million); and “megaprojects” incentives (unspecified but “hundreds of millions”). Some of the state’s 400-plus tax break programs are familiar to many, like those mentioned above. Most, however, benefit from their obscurity, proliferating in near secrecy. While some of these programs may make a proportional return on investment, from a budgetary standpoint there is no difference between a tax exemption and an expenditure: Both affect the bottom line. While all state governments spend money to promote development, not all states wrestle with such enormous deficits, or have a chief executive so opposed to increasing revenue. Taken together, Louisiana’s generous giveaways account for most, if not all, of the budget gap the Legislature faces each year.

A good example of this is provided by the various severance tax exemptions. Severance taxes are taxes assessed on oil, gas, coal, marble, salt, brine and other substances when the mineral is “severed” from the ground or removed from the natural environment. There are different tax rates levied for different types of materials. For example, the severance tax on oil is 12.5 percent of its value at the time and place of severance, while the gas tax is $16.3 cents per thousand cubic feet (MCF). Currently severance taxes constitute about 10 percent of the state’s general fund revenue. Severance taxes are subject to different kinds of exemptions, which limit the taxes owed, leaving the state with less money. Exemptions are put in place to encourage exploration, investment and development by companies that might not, without the exemption, find it profitable to pursue a particular project.

Despite their rationale, severance tax exemptions on oil and gas have been under intensified scrutiny ever since “Budget Crisis” joined Mardi Gras as a perennial Louisiana event. Combined, the cost of severance tax exemptions between 2008 and 2014 has been estimated at $2.4 billion dollars, with one program, the exemption for horizontal drilling (which has expanded with the advent of fracking), returning $1.2 billion in state dollars to businesses over that period. While these exemptions may help spur business development, Louisiana’s largesse comes at a time when the state has been struggling to adequately fund health care, higher education, roads and K-12 education.

Although concern about “out of control” tax exemptions has often been voiced by elected officials, it has been difficult for legislators to get an accurate accounting of the myriad tax breaks that reduce revenue to the state. Two recent bills attempting to make this process more transparent came up short, victims of the governor in the first case and the oil and gas lobby in the second. Senate Bill 222, authored by Sen. Jack Donahue (R-Mandeville), would have required the state’s Revenue Estimating Conference to delineate the costs of each tax break to the state. This bill was vetoed by the governor on grounds that it could “create uncertainty about the state’s commitment to job creation and economic development.” Ruston Democratic Sen. Rick Gallot’s bill, SCR 142, which would have required an audit of both the Department of Natural Resources and the Department of Revenue to improve the accuracy of severance tax information and encourage collection of unpaid severance taxes, failed in the House. While it breezed through the Senate 35-0, it failed to garner a 53-vote majority in the House (48-44), a defeat Gallot attributed to the power of the oil and gas lobby that mobilized to defeat it, although this influence was later denied by Gifford Briggs, who handles governmental affairs for the Louisiana Oil and Gas Association. The defeat of these two bills, written with the single purpose of shedding light on the confusing terrain of state exemptions, refunds and credits, makes it unlikely that this morass may be clarified any time soon. To put this in perspective, the governor and legislators have essentially said, “We don’t know which companies are not paying their taxes, and we don’t want to know because it might embarrass them, and us.”

The question of how the state gains, prioritizes and dispenses revenue is perhaps the most important issue in the upcoming race for governor. Understandably, given his long tenure leading the Department of Natural Resources (2004-12), Public Service Commissioner Scott Angelle, according to The Advocate, is convinced that the expensive “incentive for horizontal drilling is going to prove one of the best investments this state has ever made.” As co-author of the 2002 bill creating film credits, Lt. Gov. Jay Dardenne defends them arguing that he is “not going to concede” that the film credit is “a net loser” despite recent estimates that the program returns 23 cents on the dollar. Democratic state Rep. John Bel Edwards of Amite has voiced concern about rampant exemptions, pointing to a “structural problem” with the budget, but would not specify which programs should be eliminated or altered. U.S. Sen. David Vitter thinks all exemptions should be examined, yet believes the Megafund program that spends hundreds of millions to entice businesses to Louisiana has been productive.

Unlike the current governor who has aided, and indeed abetted, this wretched state of affairs, the next governor must address the issue of proliferating and expanding tax exemptions that limit the ability of the government to pay for vital services while distorting and constraining the budgetary process. There is no area in which leadership is more desperately needed.