The recent announcement by Sasol that it was delaying construction of its $14 billion gas-to-liquids plant should serve as a teaching moment for state policymakers. In a year when Louisiana is facing its worst budget crisis in recent memory, it serves as a reminder of the pitfalls of using scarce taxpayer dollars to chase economic development “wins” instead of focusing on the fundamental building blocks of economic success — an educated workforce, affordable health care, safe streets and reliable infrastructure.
For those who missed the news, Sasol is a South African petrochemical giant, and its factory planned for Lake Charles was set to be the biggest industrial project in state history. But when oil prices tanked, the economics of the project no longer made sense. So it’s been mothballed indefinitely, and with it the 750 permanent jobs that were slated to come online once construction was finished.
The company’s change of heart is merely the most visible evidence that while falling gas prices are good for most consumers, Louisiana’s economy — and the state’s ability to pay for basic services — remain vulnerable to swings in the energy sector.
But it also tells us something about the limits of corporate tax incentives. Louisiana offered Sasol $257 million in state subsidies — $115 million of it in cash — and as much as $3 billion in property tax breaks to build its factory. The subsidies are so lucrative that some economists question if the state will ever recoup its upfront investment.
But the state’s generosity wasn’t enough to overcome the market fundamentals that dictate business decisions. In this case, the falling price of oil affected Sasol’s plans. No tax giveaway will change that. It is all about supply and demand, just like Economics 101 taught us.
Businesses make location decisions for lots of reasons. Being close to their supply chain and customers is a major factor. That means things like good roads, access to ports and pipeline networks matter. They look at the local workforce and quality of life issues like schools and hospitals, public safety and even the weather. Taxes and incentive payments are just one factor among many.
Policymakers should stop asking themselves how much tax money it will take to lure the next factory to Louisiana and start asking how they can make Louisiana more attractive to investment by modernizing our infrastructure, improving training programs and making sure everyone has access to great schools and hospitals.
Right now, we aren’t on the right path. Louisiana has cut state support for higher education faster and farther than any other state since the start of the Great Recession, with more cuts on the way. Professors are leaving, degree programs eliminated and students being asked to pay more for less.
Our roads and bridges are in dire shape, with a $12 billion backlog of needed repairs that is getting worse each year because we don’t spend enough on routine upkeep. Health care services are suffering, too, as Louisiana continues to rank among the least healthy states and hospitals are being forced to cut emergency services because of a lack of funds.
There is a better way forward, and it involves asking how much we can afford to spend on corporate incentives and tax-code spending programs. Every dollar the state spends on these incentive programs means less money for roads, colleges and health care. The property tax breaks meant to lure companies to our river banks mean less money for children in local schools, parks and libraries, fire and police protection.
That is not to say Louisiana should do away with such programs altogether. As long as other states have tax incentives in place, some uniformity is needed. But in recent years these programs have grown out of control, and they are one reason Louisiana faces a massive $1.6 billion budget gap.
Louisiana is a great state full of generous people with a culture that is second to none. But it is also true that it would be much nicer to “come home” if we worked on solving our problems in education, health care and infrastructure.
Steve Spires is a senior policy analyst with the Louisiana Budget Project, a left-of-center nonprofit research organization based in Baton Rouge. His email is [email protected].