The false promises of corporate tax breaks do real harm — here’s what states should do instead 

Across the country, state governments have spent decades creating so-called “economic development” plans. Using tax policy, they’ve tried — unsuccessfully — to recreate boomtowns like Silicon Valley or North Carolina’s Research Triangle. Economist Milton Friedman once quipped, however, there’s no such thing as a free lunch, and as our work at the Ohio River Valley Institute (ORVI) has shown, the hidden costs of tax incentives can be massive. 

States and local governments make headlines by trying to lure in big deals, as with the bidding war to “win” Amazon’s second headquarters — a project that is already being scaled back. Governments race to the bottom, chasing companies that over-promise and under-deliver, exempting tax dollars that their communities can’t afford to lose.  

The most egregious example is Louisiana’s Industrial Tax Exemption Program, or ITEP. ORVI’s latest report shows how, despite exempting over $20 billion in the last 25 years, ITEP has not only failed to bring jobs and economic growth to Louisiana, it’s made communities demonstrably poorer and likely sicker. 

Economics is complicated, but the reason for Louisiana’s disastrous outcomes is not. ITEP does not provide direct investment into the state’s economy. Instead, it gives oil, gas and chemical companies massive subsidies to continue a way of business that harms communities.  

Since 1936, an unelected state board has had the power to exempt companies from nearly all of their local taxes. What’s more, the exemption historically had no job creation requirements. Companies received benefits regardless of their economic impact. And while Louisiana’s previous governor tried to reform the program, the new governor issued an executive order last week that once again reduces accountability and local input.  

At the same time that companies across the country take advantage of systems like ITEP, they leave behind an expensive mess for the public. Many companies that receive ITEP tax breaks are among the biggest contributors to climate change, such as a proposed Formosa plastics facility that could emit the equivalent of 3.5 coal-fired power plants. 

In the infamous “Cancer Alley” corridor between Baton Rouge and New Orleans, some ITEP recipients have indirectly burdened families with healthcare costs and premature deaths. The state population between 1936 and 2023 grew 35 percent slower than the country and Louisiana has lost population for each of the past seven years — not the outcome one would expect when sacrificing billions of dollars for “job creators” to come to town.  

Why doesn’t reality match the hype of tax incentives? Fancy models that companies use to forecast jobs are often over-inflated by flawed assumptions. They omit costs that a company never has to pay, like declining home prices near factories, environmental damage, health costs that individuals pay, and congestion effects that can drive up expenses for other local businesses and residents. By not accounting for these offsetting costs, the benefits of tax incentives do indeed appear to be a free lunch —that is, for the companies that receive them.  

When policymakers blindly trust these forecasts and award tax giveaways with no clawback mechanisms, they deprive local governments of desperately needed revenues. Rather than being reinvested locally, these lost funds are simply pocketed by corporations. Often their headquarters (and highest paying jobs) aren’t even in the state. Our report looks at the data and shows that ITEP is uncorrelated with the creation of net new jobs and unconnected to rising incomes.  

That’s right: not only do these tax giveaways result in less funding for schools, sheriffs and infrastructure, but they almost never bring in the economic boom they promise. In fact, Louisiana communities who have lost the largest share of money to ITEP have consistently had among the lowest jobs and income growth.  

There’s a better way. When we invest in residents’ quality of life and promote local start-ups, communities grow and diversify their economies. It’s already happening with great success in places like Centralia, Wash. Instead of chasing the next factory that makes big promises, towns can keep more dollars to invest in infrastructure, education, the trades and small-business programs. These investments are cleaner and help to generate startups like restaurants, retail and local service providers — the real job creators.  

Almost a century of evidence is clear: states are in a race to the bottom when they compete to give money away to out-of-state companies. By investing in their own people, policymakers can attract new businesses and residents and grow their economies in a cleaner, more sustainable way. It’s time Louisiana policymakers follow the evidence and invest in their people, not just petrochemical companies. 

Nick Messenger is senior economic researcher at the Ohio River Valley Institute.