W. Bowers for their invaluable guidance and assistance in writing this comment. The author would also like to thank her family members and friends for the continuous support they provided, especially her husband Jeremiah. Tax Increment Financing: Louisiana Goes Fishing for New Business

• Author: John Grand
• Pages: 851-884

Page 851

Special thanks are due to Professor Ken Murchison and the attorneys at Jones Walker Law Firm for their assistance with advice and research for this article.

Don't tax him, don't tax me, tax that fellow behind the tree.

United States Senator Russell B. Long

I Introduction

Promoting economic development is a challenging task for politicians. Voters lean on their representatives to bring new businesses, new jobs, and new money into local economies. Spurred by pressure from their constituents, politicians creatively work to develop incentives to attract new growth. Unfortunately, politicians can get too creative and devise development plans that are more costly than beneficial. In Denham Springs, Louisiana, the politicians got too creative. Page 852

Politicians in Denham Springs recently took advantage of a new law in Louisiana that allows local government bodies to give large financial incentives to new businesses. The politicians plan to spend over fifty million dollars on the development of a Bass Pro Shops in Denham Springs. The constitutionality of this act has been challenged by a local taxpayer in the case, Denham Springs Economic Development District v. All Taxpayers,¹ which has quickly made its way to the Louisiana Supreme Court. The case gave the supreme court the opportunity to define the constitutional boundaries for legislative assistance to economic development in Louisiana.

Specifically, the case raises two constitutional questions. First, can voter-approved taxes be spent in any manner that politicians choose? Second, does the Louisiana Constitution permit state funds to be given to private businesses in the name of economic development?

Both the trial court and the first circuit court of appeal found in favor of the broad power of government to encourage economic development. The Louisiana Supreme Court reversed, but its decision avoided the constitutional issues by resolving the dispute on narrow statutory grounds. The end result is that a cloud of uncertainty still surrounds the future of tax increment financing in Louisiana.

Part II of this comment examines the complicated tax increment financing program Denham Spring hopes to use to develop the Bass Pro Shops. It details the statutes authorizing the proposal and discusses how other circuits have resolved challenges to the law. Part III discusses the Bass Pro Shops decision. This comment then analyzes the constitutional issues left unanswered by the court and focuses on why these issues must be resolved. Finally, this paper concludes by demonstrating the ineffectiveness of Louisiana's tax increment financing laws as a tool for economic development and suggests possible standards the state could use to ensure the program is applied fairly and efficiently.

II Tax Increment Financing

Even before Hurricanes Katrina and Rita, Louisiana's economy had room for improvement. In 2004, Louisianians earned on average $27,219. Comparably, residents in the southeastern United States had a per capita income of $29,754 during the same Page 853 period.² Thus, residents of Louisiana earned $2,535 less than residents of similarly situated states.³ Especially in light of the recent natural tragedies that have befallen the state, Louisiana's economy has drastic room for improvement.

Encouraging economic growth is always a difficult proposition, with potential solutions always generating considerable opposition. The Louisiana Legislature recently designed controversial legislation with the aim of creating growth. The new solution is called tax increment financing, which permits government subdivisions to use tax revenues to offer financial incentives to private businesses in hopes of encouraging new growth.⁴

A How It Works

Tax increment financing is a method of trapping incremental increases in tax revenues generated from new businesses and using them to fund local government projects. Generally, a state passes enabling legislation allowing city and parish governments to create special taxing districts.⁵ The district can be as small as a single building or as large as the government body creating it. The district then issues bonds and spends the subsequent revenue developing the area. Presumably the investments will bring new growth and new tax revenues. The districts use these new revenues to finance the bonds.⁶

When a district is created, tax dollars are essentially divided into two streams. The first stream represents the amount of money the district received in taxes before the creation of the district. The second stream represents all increases in tax collection in the district after it is created. This amount collected in the first stream remains constant. Thus, if a district generated one million dollars in tax revenue before the creation of the district, local taxing authorities will continue to collect one million dollars in tax revenue. The amount in the second stream depends upon the level of new tax dollars collected. Using the one million dollar example, Page 854 any taxes collected in excess of one million dollars goes into this stream. Presumably increases are attributable to the district's investments, so the district should be able to use this money to fund the redevelopment projects.⁷

B How It Developed

In response to decreases in funding for urban renewal projects, states began looking for creative ways to use local tax dollars to generate growth in blighted districts. At the forefront of this movement was California.⁸ As people and wealth migrated out of city centers, California faced aged and deteriorated urban areas.⁹In an effort to revitalize these areas, the state enacted the California Community Redevelopment Act of 1945. The Act allowed municipalities to create agencies for the purpose of attacking these problems. The legislation's major problem was its lack of funding to the agencies.¹⁰ A solution to the lack of funds came in the form of the Federal Housing Act of 1949.¹¹ This program provided grants and loans for urban redevelopment. The Act required that a locality must only furnish one-third to one-fourth of the overall costs of the project. Cities with money took advantage of this program, but many still searched for ways to increase funding for the projects.¹²

In 1951, California codified the Community Redevelopment Act and renamed it the Community Redevelopment Law.¹³ This law further enacted provisions that authorized tax increment financing.¹⁴ It would take another twenty years before tax increment financing became popular in other states.

As new leadership took over in the 1970s, funding for programs became tight. President Nixon put an eighteen month moratorium on all new federally funded urban renewal projects and, in the 1980s, President Reagan's supply-side policies further reduced funding. In response, states began authorizing localities to Page 855 use tax increment financing as a way to trap local tax dollars for redevelopment programs. Today, nearly every state authorizes tax increment financing.¹⁵

C How It Works in Louisiana

Louisiana's Cooperative Economic Development laws authorize tax increment financing.¹⁶ Since the last legislative revisions in 2002, four different categories of laws authorize tax increment financing. The first contains general rules that broadly authorize tax increment financing.¹⁷ The second authorizes tax increment financing in larger parishes and municipalities.¹⁸ The Page 856 third, added in 2002, allows tax increment financing in most other parishes and municipalities.¹⁹ The final category creates special districts throughout the state and grants them tax increment financing authority.²⁰ The Bass Pro Shops project in the city of Denham Springs is controlled by the third category of laws.

The four categories of laws authorizing tax increment financing allow the use of two types of taxes to fund these projects-ad valorem taxes and sales taxes.²¹ Page 857

1. Ad Valorem Taxes

Originally, local governments could only use ad valorem taxes to finance tax increment financing programs.²² Louisiana adopted tax increment financing in 1979.²³ Louisiana Revised Statutes 33:9032 amended the laws controlling cooperative endeavor agreements by allowing the use of tax increment financing to fund cooperative endeavor agreements.²⁴

Louisiana Revised Statutes 33:9032 generally authorizes ad valorem increment financing, but this statute is short and undetailed. It fails to outline what procedures governmental subdivisions must follow and gives no direction regarding when this method should be used.²⁵ The statute also requires that any bond proposals using ad valorem increments be put before the voters of the district.²⁶ The lack of detail and the voter approval requirement make the statute unappealing to local politicians. As a result, Revised Statutes 33:9032 has had little significance.

In 2002, the Louisiana legislature enacted Revised Statutes 33:9038.3, which authorized a broader use of ad valorem increment financing. Originally, the statute only applied to municipalities and parishes with a population of less than 200,000, but this was amended in 2004 and 2005 to encompass the majority of Louisiana.²⁷ Revised Statutes 33:9038.3 permits the use of ad valorem tax increments to either directly finance development projects or indirectly guarantee that...