Louisiana’s Tax-Share Problems Prove Clawbacks Must Be Standard

Louisiana’s “procurement processing program,” passed in 2012 and couched as a research and development boon, has instead rebated more than 90% of collected sales tax to consultants and out-of-state companies with almost nothing left to benefit research centers. The only tangible outcome for Louisiana is a brewing interstate tax policy war with Texas.

The problem isn’t just Louisiana’s. States across the country have been green-lighting similar incentive deals for years without including basic accountability thresholds that would be a given in similar deals between private parties.

That’s why clawback provisions should be mandatory in any public incentive program. Such provisions—which are standard in much of the private sector—would ensure that if the promised jobs, investment, or public benefits don’t show up, taxpayers aren’t left holding the bag.

In private deals, each party zealously advocates for its own interests; in public deals, that responsibility falls to lawmakers. But lawmakers are only beholden to the parts of a deal that the public has eyes on.

The 2012 legislation was a clever bit of economic engineering: Lure “payment processing” subsidiaries into Louisiana, run taxable sales through those entities, and share the revenue among the state, the participating companies, and any consultants that recruited them.

The sold goods would never travel through Louisiana—and would perhaps never leave the state they were produced in. But by exploiting a rule for siting sales, the transaction could be deemed to have occurred within state lines. The tax revenue collected by these payment processing subsidiaries would be directed toward research institutions.

More than a decade later, the ledger suggests the revenue went in a different direction. In 2023, Louisiana collected $73 million in sales tax under the program and rebated $67 million, good for about 92%, to essentially everyone but research institutions. In 2022, the percentage split was even worse: 93.5% rebated. Not a single dollar of the research funding ever materialized.

What makes Louisiana’s problem especially galling is that the state has already demonstrated it understands the concept of clawing money back—just not in the public’s interest.

Buried in the 2012 statute is a “recapture” clause that allows the state Department of Revenue to recover rebates if a transaction fails to qualify as a new taxable sale under the program’s definition. That’s a compliance check to make sure the paperwork was in order that could have been expanded to demand accountability for failed public promises.

People walk on Bourbon Street in the French Quarter in New Orleans.

Photographer: Mario Tama/Getty Images

Louisiana has the highest combined state and local sales tax rate in the country, set to pass 10% in some parishes. In a state where residents are paying that much whenever they buy necessities, it’s hard to justify sales tax dollars being funneled away to private rebates and then to public priorities only if there is something left.

Other states aren’t immune to the allure of showering private interests with public funds, if not to the same degree as the Pelican State. After its own blowback over municipal retailer rebate deals, California added disclosure rules—so at least the public can see where their money is going. But there hasn’t yet been a sustained push for requiring clawbacks when promised public benefits come up short.

Without that kind of stringent enforcement, economic incentives likely will continue devolving into legalized tax shelters—or in Louisiana’s case, interstate shoving matches over money that doesn’t even accrue to state residents.

The solution is simple but not easy. In the private sector, a party that fails to deliver on a contractual promise can expect to return the money they received or face a lawsuit. Public incentive deals should be no different. Clawback provisions written into every economic development agreement at the outset would make sure that if the promised jobs, investment, public benefit, or policy promises don’t come to fruition, the funds flow back to taxpayers.

Structurally, this isn’t hard. Tie rebate eligibility to verifiable, in-state economic activity and give the Department of Revenue the ability and mandate to enforce repayment when thresholds aren’t met. Make the rebate contingent on proof of benefit rather than proof of a good story for the papers at the bill-signing ceremony.

Louisiana already runs a recapture process (at least on paper) to protect itself when a transaction fails to qualify under its definitions. The only leap here is to protect the public with that same vigor.

Politically, this would be more difficult. The first state to demand real accountability via clawbacks risks making itself less attractive to the companies it is courting by offering preferable tax treatment, at least in the short term.

Interstate tax incentives are zero sum—you only need one state to drop accountability requirements for businesses to flock there, leaving reformed policy states looking like the odd ones out. That’s why this must be a coordinated move, whether through regional compacts, national best practices, or a shift in demands from the voting public writ large.

That begins with information. The public must be made more aware of these rebate-first incentive programs and recognize them for what they are: policies that siphon tax dollars to private interests on the pinky promise of benefits that may never arrive. Ultimately, the public needs a level of awareness that leads them to demand accountability.

Louisiana’s procurement processing program makes the state a thief to its neighbors—robbing Texas and other states for pennies and then forgetting to keep the pennies. Lawmakers owe their constituents more than that. But they aren’t going to voluntarily offer greater transparency and accountability, so the public must call for it.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and practice professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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