Michael Hecht is the CEO of GNO Inc. Daniel Erspamer is chief executive officer of the Pelican Institute. Stacey Roussel is deputy director of Invest in Louisiana. They recently discussed the pros and cons of special business tax incentives at an event hosted by the nonpartisan “Neutral Ground” organization, which promotes civil discourse on matters of public interest. The Times-Picayune is a partner with Neutral Ground. The following is an excerpt of their conversation, edited for length and clarity, as moderated by Nathalie Simon, a Neutral Ground board member and special counsel to the CEO at Laitram Industries.
SIMON: The Landry administration has been particularly aggressive with incentive programs and reforms, and Louisiana has recently secured several wins. One we’ve all read about is the Venture Global LNG; they are investing $18 billion in an expansion in Plaquemines Parish. Another is the one we’ve all also read about, the Meta AI Data Center. It is considered one of the biggest economic development wins in the state’s history, $10 billion in Richland Parish. (That figure is now estimated to be north of $25 billion — ed.) And we’ also read about the Hyundai steel mill, $6 billion in Ascension Parish. All sound great, right? More jobs, more economic activity in a lot of poor regions of the state. But not everyone’s happy. Michael, what is the purpose of economic development incentives?
HECHT: There’s a three-part test for a good incentive. The first is that it needs to pass the if-not/but-for test, meaning that it has to actually change behavior. An incentive that doesn’t change behavior is basically wasted money, because the company was going to do it anyway. The second is it has to be net-present-value positive, meaning that money that is spent has to have a positive return to the state over time. And the third is it has to be permanent, meaning that if the incentive goes away, the industry or the company stays.
SIMON: Stacey, is that your three-part test?
ROUSSEL: Well, I didn’t know that we had three-part tests. Organizationally, our lens is also low- and moderate-income households. Unfortunately, there are too many of them. About 51% of the state really struggles to make ends meet, inclusive of about 20% who live below the federal poverty level. So: Are we maximizing as a state all that we can for our low- and moderate-income households?
SIMON: Daniel, you run a free enterprise think tank. What is your ideological position with regard to these incentives?
Special deals or low taxes
ERSPAMER: The challenge with incentives is that they put government in the position of picking winners or losers. And so by definition, an incentive is given to one company, one industry, one group of companies, and some political body makes that decision, some government entity or quasi-government entity. Do we want to sort of cement in the Huey Long system of government, which meant that everyone had to come to Baton Rouge to kiss the ring? And so if you are a company that has a good lawyer and a good lobbyist, and a good accountant, you can do pretty well in Louisiana. Well, the problem is, we’ve ended up with this patchwork quilt of tax policies that means, again, the government has chosen winners and losers, and we make it very difficult, particularly for new entrants into the market, for entrepreneurs. There’s a study that looked backward to say, of companies that took advantage of economic development incentives, somewhere between 75% and 98% of them said they would have done this anyway. So I think most of these are bad, and the ones that are good are hard to identify.
SIMON: But if you look at some of these projects, they do they sound promising: Meta, 500 permanent workers, 1,000 indirect jobs, 5,000 temporary workers. The Hyundai one, I think 1,300 jobs are expected with an average salary of $95,000 a year. But how does that benefit a small-business owner, working-class people? My question is, what is the return on investment?
HECHT: Let’s talk about something even more technical, but more important, which is net present value. That means that if I’m going to pay $100 to Daniel’s company because he has the best lawyers, as he was talking about before, and so he gets $100, right? So that was $100 that I spent. Then, if the state treasury, because the state gave them $100, if the state treasury gets back $10 a year in the first year, and that goes on for another 20 years, then it diminishes over time, right? The further away you get into the future, you have to discount it by some agreed-upon value, to account for inflation.
SIMON: Thank you for explaining economic development. But I do think there is that big elephant in the room, and I think we should just talk about the tax code overall.
ROUSSEL: In Louisiana, we have the 10th most regressive tax structure in the nation, according to our friends at the Institute for Taxation Economic Policy, which is a national think tank. What does that mean? It means that those who are making the least — so those who are making $18,000 or below in Louisiana — are paying about 13.1% of that income in combined state and local tax. If you go to the other end of the spectrum to our top 1% of earners, those are folks pulling down about a half million a year, they’re paying about 5.6% of their income in combined state and local tax. So really, from our perspective, the way that you raise revenue matters just as much as how you spend the revenue. But do we have what we need to invest as a state in our people?
ERSPAMER: Our baseline belief is that the best tax policy is low, flat and broad, right? That everyone has some skin in the game; that is, everyone pays essentially the same rate based on their decisions, and that it is as uncomplicated and simple as possible. Historically, Louisiana has had one of the most complex tax codes in the country. If you look at the data, states that follow “low, flat and broad” have the best economic outcomes. … And I suspect one of the things that Michael will tell you from talking to businesses — I certainly hear it all the time — is that simplicity and predictability matter almost as much, in some cases more, as what the tax rate is. And Louisiana has a history of unpredictability. This is a question of opportunity costs, and the opportunity cost for these sorts of tax incentives and credits and special carve-outs is that that’s money that could be reduced in taxes … or, not to speak for her, but I suspect what Stacey might say, to spend on government services.
The case for “good” incentives
SIMON: Michael, it sounds like Daniel’s saying, and I think Stacey as well, that although they have very different solutions, they’re saying, “simplify the tax code, and business will come.” No more need for economic development. I guess my question is, are these incentives enough to keep these businesses here long term?
HECHT: I have on my note card some examples of good incentives and some examples of bad incentives. Good incentives have to pass at least most of those three tests I mentioned earlier. So, the digital media incentive, I believe that over time it’s going to be positive net-present-value. You look at the slow but steady growth we’re having in companies like Copado, DAA, High Voltage Software. Then there’s the historic tax credit: If the historic tax credit for rebuilding did not exist, we would not have a downtown post-Katrina, and whole historic downtowns in this country would not exist. It is a stimulative incentive that jumpstarts the market, creates those buildings, which are now condos and offices and entertainment centers that become revenue-producing for the state. So that one passes the “if not/but for” test.
SIMON: We live in a poor state and region. How do you sell taxpayers on spending money on incentives versus basic services when basic services of government are not functioning?
ROUSSEL: I would like to say a word in defense of the safety net in Louisiana. There are some things we do really, really well when it comes to making a safety net that does work. There are some things that we don’t do well, but Louisiana has one of the lowest uninsured rates in the nation, and that’s because we expanded Medicaid, and those are public dollars that go into private health care providers, private health insurance companies, and what we get in return is that when people are sick, they get to go to the doctor. And that’s a great thing. It’s really important that the safety net remains strong and we have enough money to keep it running.
