Chemical Companies Are Building Their Plants Overseas and Shipping Them Back In. They Still Get State Tax Breaks.

Twice during the last decade, chemical giant Methanex has disassembled a massive methanol plant located at the southern tip of Chile and moved it to Louisiana.

Each time, pieces of the facility weighing up to 1,500 tons — the equivalent of eight single-story houses — were loaded onto barges, which were then parked on top of a huge ship designed to carry offshore drilling platforms.

The ship traveled through the Strait of Magellan, along the east coast of South America, into the Gulf of Mexico and up the Mississippi River. A steel bridge was constructed to allow 18-wheelers to drive onto the ship and take the cargo to Geismar, in Ascension Parish, where the building blocks could be put back together.

For Methanex, taking apart two already-built plants in another country and shipping them more than 5,000 miles was cheaper than building them on-site in Louisiana. The result was far fewer on-site construction jobs in the state.

Nonetheless, Methanex was able to take full advantage of the Industrial Tax Exemption Program, or ITEP, a lucrative tax break aimed at luring big facilities to Louisiana. The program — one of the most generous of its kind in the nation — exempts major industrial facilities in Louisiana from most property taxes for up to a decade. ITEP cost local taxing bodies $1.9 billion in forgone taxes in 2017, according to Together Louisiana, a grassroots organization that has advocated for more stringent requirements for the program.

The primary argument in support of ITEP is that it brings jobs to the Bayou State. The tax breaks pave the way for huge factories that might provide hundreds of permanent jobs, plus thousands of temporary construction jobs during the building process.

But both rationales are wearing thinner, documents and interviews show.

With increasing automation, many chemical plants these days employ far fewer permanent workers than they used to. The number of large industrial plants in Louisiana grew by 17% between 1990 and 2017, in part due to a boom fueled by cheap natural gas, records show. But the number of chemical manufacturing jobs in the state decreased by 5% over the same period, according to federal Bureau of Labor Statistics data.

The process of building a plant likewise doesn’t spin off as many temporary local jobs as it once did, thanks in part to modular construction — or building large pieces of the project elsewhere and shipping them in.

Methanex’s decision to move two already-operating plants is unusual. A less extreme example of the way industrial construction is changing can be seen in Formosa’s plans for a $9.4 billion chemical complex in St. James Parish, a project it has nicknamed the Sunshine Project.

The facility’s huge price tag ranks it among the state’s five biggest recent industrial projects. But Formosa expects 60% to 80% of its capital expenditures will go out of state, according to documents the company submitted to the Louisiana Department of Environmental Quality. That’s because large pieces of the facility won’t be built or purchased in Louisiana.

Those details have been buried in Formosa’s public statements about its plans, which promote the notion that the company “is investing $9.4 billion in St. James Parish, Louisiana to construct and operate one of the most innovative, single-site ethylene and propylene production facilities in the world.”

Elsewhere, Formosa has acknowledged that it will spend at most $3.8 billion in Louisiana to complete the project.

In a statement, Formosa defended its decisions. It said when construction is complete, the project will create 1,200 new jobs with an average salary of $84,500, plus benefits. “Large facilities like this do require some pre-constructed modular pieces of equipment that are very large and by necessity are made outside of Louisiana and in some cases the United States,” it said. “The Sunshine Project will create significant economic benefits for the state and the area, and we are committed to hiring locally.”

Kendall Dix, a campaign organizer with Healthy Gulf, an environmental advocacy group, says that the company’s $9.4 billion figure misleads the public into thinking that ITEP is doing far more for the economy than it is. “That’s like me saying I invested thousands of dollars of electronics, food preparation machinery, textiles and sporting equipment in Orleans Parish, Louisiana, when I moved into my apartment,” he said.

Louisiana construction companies, manufacturers and ports all say modular building is on the rise. But it’s hard to say how pervasive it has become.

While construction worker salaries and overall construction expenses are a significant part of the value a project brings to the state and a parish, the state does not require any detailed reporting about them, according to Louisiana Economic Development. Instead, projects are evaluated on whether they create — or retain — any permanent jobs for the duration of the exemption.

Like Formosa, Wanhua Chemical intended to use modular construction to build pieces of its planned $1.3 billion chemical plant in China and ship them to St. James Parish for local assembly. But steel tariffs on the modules — a result of President Donald Trump’s trade war with China — were expected to be too high, which contributed to the company’s recent decision to put the new facility on hold.

A report published this summer by the consulting firm McKinsey & Company points to an increase in the value of modular construction companies as a sign that the building method is growing in popularity.

Modular building has many benefits for companies trying to keep large projects on schedule, said David Helveston, president and CEO of the Pelican Chapter of Associated Builders and Contractors. It can be good for workers, too. They typically build components indoors, where weather doesn’t delay construction. And they work on the ground “rather than being 60 feet in the air welding two pipes,” Helveston said, making it a lot safer.

But modular construction means fewer jobs on-site. That’s because the modules are prefabricated with standard connections that “can be assembled onsite like a series of Lego bricks,” according to the McKinsey report.

A drop in the number of short-term construction jobs — often the largest percentage of local employment to come out of new industrial facilities — undercuts one of the major reasons for programs like ITEP, said Greg LeRoy, executive director of Good Jobs First, a national nonprofit that advocates for accountability in economic development.

“If you’re losing some of that buying power of the assembly, it cuts into the justification for incentives,” he said. “It cuts into the ripple effect for the Louisiana economy.”

In a recent interview, Gov. John Bel Edwards — who has taken flak from political opponents for ordering a modest curtailment of ITEP — said he is concerned that modular building methods could be sapping the program’s ability to create jobs. He said he has asked his cabinet to investigate.

“I don’t think an exemption from taxes as generous as the ITEP can be justified, absent job creation,” Edwards, a Democrat, said in a recent interview. “So any part of the construction of a manufacturing facility that doesn’t lead to jobs in Louisiana, we need to take a look at and take that into consideration, potentially.”

But Jim Patterson, with the Louisiana Association of Business and Industry, said that it’s hard to say whether the state is really experiencing a loss in the total number of construction jobs, because jobs lost on site could be offset by the number of construction jobs at prefabrication companies. “There are prefabrication companies in Louisiana that are performing these services for other states,” he said.

He also pointed out that prefabrication is necessary for some companies to stay competitive within their industry, as the practice shortens construction time and can make building facilities less costly.

More generally, business advocates in Louisiana say the ITEP program is invaluable because it lures companies to build new facilities in the state, which in turn bring jobs and increased opportunity for local businesses.

Incentives Not Necessarily Driving Investment

This new critique of the ITEP program is hardly the first.

Timothy Bartik, an economist with the W.E. Upjohn Institute for Employment Research, reviewed the incentive programs of 33 states, representing more than 90% of the national economy, in 2017. Louisiana had the third most-generous incentives, after New Mexico and New York. States were ranked by the incentive’s size compared with the firm’s overall costs.

Nationwide, the cost of incentives has tripled since 1990, Bartik wrote in 2018. Incentives now cost states $45 billion per year, which is comparable to what they bring in from corporate income taxes.

But research suggests the incentives are a relatively inconsequential factor for companies deciding where to locate. Among Louisiana officials, there’s often a fear of losing large industrial projects to Texas. But a 2018 analysis of a Texas incentive program found that only 15% of companies that received tax breaks were persuaded to locate in the state based on the incentive.

That’s because all state and local taxes combined only make up about 1.8% of industry costs on average, LeRoy said. That number is based on an analysis of federal statistics by Good Jobs First.

“It’s pocket lint in the broader scheme of things,” he said.

The most important factors that determine where companies locate a facility are infrastructure and utilities, said Ron Crum, a site selector who works for CSRS Inc., a regional consulting engineering firm in Baton Rouge.

Crum has helped find sites for various major projects in Louisiana, including South Louisiana Methanol’s $2 billion facility and Yuhuang Chemical’s $1.9 billion methanol facility. Both are being built in St. James Parish.

Sometimes facilities require 100 megawatts of electrical power or a dock with deep-draft access. Petrochemical facilities can also require access to a key raw material, such as natural gas, which further limits the places where a plant can go.

“Almost every type of facility has one or two critical siting criteria that dominate the overall location decision, regardless of workforce, incentives, business climate, or quality of life criteria,” Crum wrote in a blog post on the topic. “A great workforce or incentives cannot overcome the lack of redundant power, low data latency times, a deepwater dock, proximity to a key client, or a key raw material pipeline.”

The low price of natural gas has been the biggest driver in the recent boom of industrial plants moving to Louisiana. It’s the central reason Methanex disassembled its two methanol plants in Chile and shipped them to be reassembled in Geismar.

Downsides of ITEP

While the benefit for companies that receive incentives may be relatively minor, the cost to local taxing entities can be significant.

New jobs bring more people to a community, which requires additional public spending on schools, roads and police, Bartik said. And tax incentives as large as those given away by Louisiana mean that these added budget costs must be paid for locally by increased tax rates or spending cuts, offsetting the theoretical benefits.

Take, for example, Calcasieu Parish, which borders Texas. About $4.6 billion in property taxes were forgone in the parish through ITEP between 1998 and 2018 — an average of $230 million a year. Despite continued industrial development in the area, the parish lacks the funds to pay for a new Interstate 10 bridge in Lake Charles. A 1994 ethylene dichloride spill in the area of the bridge pilings is expected to add to the cost of a replacement.

The current bridge has a sufficiency rating of 7.6 out of 100 by the National Bridge Inventory. To put that in context, the Interstate 35 West bridge in Minneapolis that collapsed in 2007 had a sufficiency rating of 50.

It’s because of such criticisms that Edwards signed two executive orders in 2016 aimed at reining in ITEP.

His orders gave local governing bodies the ability to vote on exemptions for projects that would affect their tax base. They also ended the allowance of exemptions for miscellaneous capital additions and required companies applying for the exemptions to demonstrate that they would add jobs — or at least retain existing ones.

Formosa was among 26 companies that filed ITEP applications one day before Edwards introduced the new rules, meaning they’ll get the benefit of the old rules: 100% property tax abatement for 10 years, without the approval of local taxing bodies.

There have been at least 30 votes for denial of exemptions by local boards across the state under the new rules in the last three years, according to Louisiana Economic Development.

The most publicized no vote came this January, when the East Baton Rouge Parish School Board voted 5-4 against giving Exxon Mobil a tax break for an expansion completed in 2017. It was the first time the cash-strapped school board had ever voted against a tax exemption.

Following the vote, Exxon Mobil pulled tax exemption applications for a project completed two years earlier that was scheduled to go before the East Baton Rouge Parish Metro Council. Its reasoning, according to a prepared statement: The new rules had created “ongoing local uncertainty.”

Despite Edwards’ changes, Louisiana is seeing a massive boom in industrial projects.

Over the past four years, the total value of investments approved under ITEP exceeds $100 billion, according to the department of Louisiana Economic Development, though more than $70 billion of that was approved before Edwards’ executive orders taking effect. In the last four years of Gov. Bobby Jindal’s tenure, it was $50 billion. “So, these people who say the sky is falling because I changed the rules, there was twice as much investment,” Edwards said.

During the most recent legislative session, state Rep. Rick Edmonds, R-Baton Rouge, introduced a resolution that would have limited local votes to a three-person panel made up of the sheriff, parish president and school board president. The bill called for the panel to approve or deny all of the exemptions for a project in an up-or-down vote. The resolution fell three votes short of the threshold required to pass.

Some local officials are taking advantage of their newfound authority. Last month, the St. John Parish Council rejected ITEP applications from Nalco and Marathon, two large industrial employers in the parish.

But in other parishes, exemptions continue to receive approval, and some residents question whether their leaders are thoroughly assessing the costs and benefits of the giveaway. Henrynne Louden, a resident of Geismar, in Ascension Parish, where Methanex moved its two methanol plants, has been pushing for more transparency in the tax exemption process there.

“This is the first time in 80 years that local governments, local entities in local governments have had an opportunity to speak to that issue,” Louden, a retired pediatrician, said. “Let’s look at this as an opportunity to protect the taxes to make sure that we’re not continually giving away — inappropriately — monies that should be staying here and should be spent in our schools and on our infrastructure, for our fire, police, first responders and so forth.”

Louden and two other Ascension residents sued the Parish Council in 2017 for not identifying companies to which it gave industrial tax exemptions, instead referring to the projects with code names, such as Bagel and Sunflower Seed.

“Louisiana is up at the top of the states that give away ad valorem taxes,” she said. “How is Louisiana a poor state? We’re not a poor state. We’re getting handed a poor deal.”