Establish a property tax exemption for construction work in progress.
Continue to leave no exemption in the Constitution for tax assessments of construction work.
Businesses and homeowners pay property tax to local governments based on the assessed value of their property on an annual basis. The state Constitution allows certain exceptions, such as the homestead exemption, which excludes the first $75,000 of a primary home’s value, and the Industrial Tax Exemption Program, allowing temporary property tax relief for manufacturers. During the building phase for new or expanded manufacturing plants, businesses or houses, these improvements are called “construction work in progress,” or CWIP. The Louisiana Constitution does not specifically address CWIP.
The Louisiana Tax Commission sets the rules for property assessments and hears appeals from taxpayers who do not agree with their local assessor’s appraisal of their property. The Commission has no specific rules related to CWIP. The closest is Section 113 (A) which states that: “Assessments shall be made on the basis of the condition of things.” Statutory law makes a similar point. Many parish assessors have interpreted this to mean that if the new building is not complete it is not added to the tax rolls. Other assessors, particularly in areas with a lot of industry, have interpreted this differently by assessing at least some portion of development for some large projects based on how close to completion they are.
Practically speaking, since the great majority of private sector construction is completed within a year or so, CWIP is not taxed for most projects in Louisiana. But large industrial projects can take years to build with voluminous construction and machinery materials on site. Historically, many such projects have been covered by the state’s Industrial Tax Exemption Program and so CWIP often has not been assessed. A recent dispute about CWIP assessments for a major gas export plant in Cameron Parish has led local government, industry and other stakeholders to negotiate for a more permanent and accepted method of dealing with construction projects. As a result, the Legislature sought a constitutional solution during the 2017 regular session, resulting in proposed Amendment No. 1.
Across the country, states regulate tax assessment of construction work in various ways. Some states assess improvements upon completion (e.g., Connecticut, Idaho, Oregon, Pennsylvania and South Carolina). Utah assesses the full value of a project when construction begins. Others look for substantial completion, such that the work becomes taxable when it is useful for its eventual purpose (e.g., Arizona, Florida, Maryland, Virginia and West Virginia). The method used in those states would be similar to Louisiana’s new standard if the constitutional amendment passes. Several states use a prorated approach based on the percentage of construction completed, but even then there are important differences. Arkansas uses a one-year grace period and then a prorated assessment. Texas uses a prorated assessment based on the percentage of project completion, but with no grace period. This method is potentially how assessments would be done in Louisiana if grace periods were to be ruled unconstitutional. Several states also have PILOT programs (payment in lieu of taxes), which allow industry and government to negotiate the timing and amount that industry will pay; these negotiations can include payments related to CWIP. Louisiana has significant barriers to private property PILOT deals.
This amendment would prohibit property taxes levied against construction work until a project is completed. The provision says a CWIP is deemed complete when it “can be used or occupied for its intended purpose.” If part of a project is complete and the facility is up and running, that part would be subject to taxation even if other construction work on the property is still taking place. Louisiana has a standard for taxing utility construction projects, and this standard would remain in place if the amendment passes. Otherwise the amendment exempts all forms of general construction, including housing, commercial and industrial projects.
Although the change brought by this amendment is fairly clear, the future conditions are unclear if the amendment fails at the ballot. Assessors might continue to follow their current practices, which generally avoid CWIP taxation but can differ parish to parish. Some assessors might decide to adjust their method, the Tax Commission could create new rules, the state board overseeing industrial tax exemptions could change its rules, or the Legislature might seek some way to influence the process. Notably, the assessment and taxation of CWIP for a particular industrial project already has become a case for the courts. In sum, if the amendment fails to pass, the taxation of CWIP for construction projects—large and small—could become a question for the courts to decide.
The amendment codifies into the Constitution what has been the practice by most assessors on most development. Without protection, onerous taxation on capital-intensive projects could begin, potentially stifling future manufacturing plans, job growth and economic development. This could result in very different results even among adjacent jurisdictions, further disrupting economic conditions. It is unreasonable for government to force businesses to pay taxes on buildings under construction before those buildings produce a revenue stream that could pay the taxes. The new financial burden on developers and even individual homebuilders could be harmful, with impacts felt throughout the real estate industry. The potential added tax bills could discourage investors from taking on endeavors large and small, stunting growth for the state. Also, this amendment offers clarity about how CWIP should be treated by removing existing legal gray areas. The exemption would help meet the goals of uniform assessments across the state as required by the Constitution, statutory law and regulations. Businesses will be more willing to invest where there is greater predictability.
Businesses get too many tax breaks and this would be another one. Large manufacturing projects already can use the Industrial Tax Exemption Program to avoid property taxes for as many as 10 years. Local governments might need to tax construction work to pay for the increased services that will be needed once the new facility is completed. A large project can create a burden on local government as construction workers temporarily live in the area. The blanket exemption provided by this amendment is too broad. A better approach would be a constitutional amendment allowing statutory controls, giving the Legislature the ability to fine tune the exemption over time. This method would eliminate the need for further constitutional amendments about CWIP just to make small adjustments. This amendment would negate the authority of assessors and the Tax Commission on how to handle CWIP. Assessors are locally elected and need flexibility to handle situations posed by different construction projects. This amendment would tie their hands.
Legal Citation: Act 427 (House Bill 145 by Rep. Garofalo) of the 2017 Regular Session amending Article VII, Section 21(M)(1).).