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Gasflation

Gasflation

By Ryan Fitzmaurice, Senior Commodity Strategist, Elwin de Groot, Head of Macro Strategy and Hugo Erken, Head RR Economic Scenarios & Projections at Rabobank

“Everything is energy and that’s all there is to it. Match the…

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2 years ago

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Gasflation

By Ryan Fitzmaurice, Senior Commodity Strategist, Elwin de Groot, Head of Macro Strategy and Hugo Erken, Head RR Economic Scenarios & Projections at Rabobank

“Everything is energy and that's all there is to it. Match the frequency of the reality you want and you cannot help but get that reality […]” — Albert Einstein

“Jumpin’ Jack Flash, it’s a gas, gas, gas” — Rolling Stones

Summary

  • US and European natural gas prices have jumped to multi-year highs; to the extent that comparisons with the 1970’s oil crises are perhaps not as far-fetched as some would think
  • In this piece we look at the causes behind this development and explain that structural shifts in the market probably better fit the story than the “just a market fad” explanation
  • Various other markets – outside energy – such as fertilizers and ethanol production could be affected by structurally higher gas prices, adding to the host of supply-chain disruptions that businesses are dealing with
  • Moreover, if sustained – and this is obviously very weather/geopolitics-dependent – US and particularly European households could be in a for an expensive winter, as inventory levels are at multi-year lows
  • More than in the past, governments may be keen to soften the blow to households, although this would obviously have implications for budgets

Introduction

Commodity markets have been in the spotlight for much of this year and even more so recently, as tight fundamental balances, hurricane supply disruptions, and widespread inflation worries propel prices higher across sectors. Commodity gains have been broad-based in nature, with all sectors gaining this year except for precious metals.

That said, it has really been the energy sector and specifically natural gas markets that have witnessed the most explosive price rises. Natural gas prices in Europe and Asia have gone parabolic, increasing by well over 200% in Europe and 150% in Asia in a matter of months. This compares to gains of nearly 100% for US benchmark prices. So, what’s behind these abrupt and staggering price increases?

A ‘fad’ or something that was long in the making?

Looking at the big picture, the recent move in global natural gas prices is a long time in the making, and structurally higher natural gas prices are likely here to stay. The main driver is a big slowdown in natural gas production in the US, the global growth engine for such supplies over the past decade via the fracking revolution. In fact, the US was practically swimming in natural gas up until a few years ago, when LNG export capacity began to increase.

Things have changed rather dramatically in recent months, however, and the US is no longer growing supplies, with production remaining well off the pre-pandemic highs. At the same time, global demand continues to move higher as the world attempts to shift towards a zero-carbon future (As the EU has reduced the supply of emissions credit, the EU’s benchmark carbon price rose above EUR 60 per metric ton in early September for the first time in its existence. According to EEX data, by 20 September, 437 million ton of CO2 was auctioned in 2021, compared to 459 million tons in the same period last year.)  As it stands, this ambitious goal is simply unworkable without natural gas providing an important bridge away from the dirtiest of fuels such as coal and fuel oil. As such, global natural gas supply and demand balances are extremely tight and storage levels are critically low heading into the high-demand winter months.

Further to that end, our fundamental modelling is indicating that global storage facilities would be practically empty in a cold winter scenario. This would be a catastrophic scenario which the market is trying to solve for now by increasing prices so much that demand is forced to ration. We are beginning to see this dynamic play out in real-time, as fertilizer and other industrial facilities are forced to shut in Europe as a direct result of the high natural gas prices. This should help ease demand on the margin – with major side-effects, as in the threat of food shortages in the UK due to a lack but so far, no supply-side relief is in sight.

Less wind and more geopolitics

Next to the structural factors highlighted above, a confluence of - mostly transitory - factors has aggravated the shortages and hence near-term pressures on spot prices. This has caused extreme backwardation in the forward curve for gas (see figure 2) for the Dutch TTF benchmark. An unseasonably cold winter followed by low wind generation on the European continent has contributed to rising demand for gas, thus slowing down the build-up of inventories. In addition, global demand for gas was propped up by a particularly hot Summer in certain areas of the World: Southern Europe, the US and certain parts of Asia. This sparked peak demand for electricity for A/C units. All these factors together have been hampering the build-up of gas inventories.

Further to this, the supply of Russian gas has slowed down. Some observers argue this is because the administration in Moscow is trying to put pressure on the German government to hasten the certification of the new Nord Stream 2 (NS2) gas pipeline between Russia and Germany. Although work on the pipeline was recently completed, the German regulator has said it would take up to four months to complete the certification process. The pipeline is the at the center of geopolitical tensions, as both the US and Ukraine argue that it allows Russia to circumvent the Ukrainian pipeline – threatening its security. Moreover, the US is concerned the pipeline would raise Europe’s reliance on Russian gas – which it obviously does. That Gazprom and the Kremlin have said gas sales can be ramped up after the approval lends support to the view that the gas deliveries are being used as a tool to put pressure on the process. Earlier this week, the IEA threw its weight in the discussion, saying that Russia “[…] could do more to increase gas availability to Europe […].”

Aside from the question whether Russia would be able to ramp up production at short notice (and in such a way that total deliveries through both pipelines would significantly outstrip normal deliveries), concerns over future supplies are not entirely without merit. The duration of the certification period, with a decision then falling right in the midst of the European winter, is clearly one aspect that doesn’t help.

We also know that several other EU countries, such as Poland, are very unhappy with the increased reliance on Russian gas. Moreover, in late August, a German court ruled that NS2 is not exempt from the EU competition rules, which implies that the operating company must unbundle its business, as pipeline owners and suppliers cannot be the same. Meanwhile, a (big) victory for the German Greens in the upcoming elections could be a further complicating factor. Their leader, Annalena Baerbock, has been advocating a hard line vis-à-vis Russia. This, in turn, also adds to the risk that Russia may first up the ante in this geopolitical chess game.

One can meanwhile posit that perhaps Moscow would not be entirely unhappy to see further division and economic weakness in Europe, especially if that is a precursor to it still ending up with a dominant position in EU energy supplies.

Amongst the geopolitical turmoil, Norway has stepped in by allowing state-owned Equinor to export an additional 2 billion cubic metres (bcm) of gas from the 1st of October onwards. Still, one can question whether this additional amount is meaningful to alleviate of Europe’s gas woes, as the net average import of natural gas on a quarterly basis in Europe amounts to more than 100 bcm.

Other markets may be affected as well

The supply-chain disruptions that the world has witnessed since Covid, in sectors such as semiconductor manufacturing, now has its own equivalent in the natural gas crisis. First of all, electricity providers are being hit hard, especially if they have not sufficiently hedged their purchases. This already appears to be a reality in the UK.

Yet the gas shortage also highlights the dependency of other (energy) markets to gas, and those that rely heavily on electricity - which is a very long list.

Clear examples are the production of ethanol, which requires a lot of heating (by natural gas) to distilled alcohol. And the list goes on and on: aluminum production, (specialized) chemicals such as paint, refined products, plastics and food packaging.

Almost the entire economy is involved one way or another in a cascading effect – just as we have seen in other areas of seemingly-innocuous supply chain disruption.

Fertilizer production is a prime example that shows the complicated nature of current-day supply-chains. Modern fertilizer plants use natural gas to make ammonia by adding nitrogen (from the air). Several big fertilizer producers have already been forced to cut back production. But the impact doesn’t stop there, because carbon-dioxide (CO2) is a key by-product in modern fertilizer plants. This food-grade CO2 is then used to stun animals for slaughter in the meat industry and for injection in packaging to extend shelf-life. So, natural gas shortages may even turn into meat shortages, as the British Meat Processors Association (BMPA) has warned.

The key point here is that even if the gas shortages are overcome, the impact will continue to reverberate through the various markets that depend on gas, potentially creating new hiccups and headaches in other chains.

Recipe for old-fashioned supply-shock recession?

It is important to note is that the recent increase in gas prices comes on top of a broad-based rise in commodities that started with a sharp reversal of the early oil price declines of 2020, and which then spread out to a much broader spectrum due to weather conditions, a quicker-than-expected re-opening of economies, and ensuing bullwhip effects (as we explain here).

This obviously raises the question whether this development is a recipe for a supply-shock recession or, at least, a slowdown in demand. Although one could argue that a rise in (relative) prices for commodities simply constitutes a wealth transfer from commodity importers to commodity exporters (and from ‘users’ or consumers to producers), the speed and extent of these transfers often leads to many second-order effects, with a slowdown in demand as a by-product:

  • Commodity producers/exporters may not spend all of their ‘windfall’ profits immediately, so global aggregate saving increases;
  • The price volatility leads to uncertainty causing lower investment;
  • ‘Middleman’ in the chain may either win or lose, depending on their position (see electricity sellers or fertilizer producers), and some of the losers may actually go out of business; and End-consumer, i.e. households, will experience a rise in prices which is unlikely to be offset by higher wages in the near-term. In other words, they see their real spending power reduced. This, in turn, may lead to a decline in confidence, changes in spending patterns and even a decline in the aggregate volume of consumption.

The 1973/74 and 1979/80 oil crises are key examples of supply shock (reduced supply at higher prices) recessions, but figure 6 shows the majority of EU recessions since the 1970s were preceded (by about 6-18 months) by a sharp rise in commodity prices.

Moreover – to put the current rise in gas prices in perspective – we have plotted its trajectory since end-2019 against the oil price development during the two major oil crises in figure 7. By these measures, the near-term price shock already exceeds those infamous 1970’s episodes!

In the next below, we look at a simulation with our NiGEM model to gauge the impact of the gas price shock on economic growth:

Macro-economic impact of gas price shock

The gas price shock potentially has some significant adverse effect on the Eurozone economy in the recovery phase from the Covid-19 crisis. If we assume the higher gas prices will result in a 1ppts higher inflation rate in the Eurozone2, distributed over H2 of 2021 and 2022, this could go at the expense of private investment in the Euro Area by 3.5ppts (figure 8).

Companies in different branches and industries are already struggling with the costs of higher commodity prices. But there is a knock-on effect on business investment against the backdrop of energy shortages, as some areas in the Eurozone will move dangerously close to the maximum energy capacity. As a consequence, for example, some companies will be refused the proper licenses to expand or start operations in a certain area. This is, for instance, already the case in the Dutch province of North-Holland (see this article in Dutch).

Although we expect an ongoing recovery of the Eurozone and the Dutch economy in 2022 (of 3.9% and 3.5% respectively), the current gas crisis might shave off 0.7ppts of growth according to our calculations.

What does it mean for inflation?

In order to gauge the inflationary impact of the recent rise in gas prices - whose impact is being particularly felt in Europe - we zoom in on the Eurozone and then further onto the Netherlands. The UK is, to some extent, a special case and so we refer the reader to the box below this paragraph.

If gas prices prove sticky, how much additional inflation would this lead to? For the Eurozone, we need to emphasize that a considerable amount of energy price inflation has already materialized, and that our baseline projections assumed a further increase in energy prices into 2021.

Our baseline Eurozone inflation projections for 2021 and 2022 were 2.2% and 1.8% respectively. However, when we take the recent gas price hike in the market as a separate ‘shock’, we estimate that it could roughly add 0.15ppts to our inflation estimate for 2021 and another 0.25ppts for 2022.

We still feel that these estimates are somewhat conservative, as we do not take into account any knock-on effects on prices of other energy sources and/or products based on gas. Moreover, we should also bear in mind that the impact may not be the same across all countries, as it depends on the amount and speed with which higher gas prices feed into electricity prices and the composition of these items in consumer spending baskets (see figure 10).

We used the Dutch 1m and 1y forward benchmark gas contract as instruments and assumed both would stay at around their present level (c. EUR 70/MWh and EUR 40/MWh) for the remainder of 2021 and 2022. Figure 9 shows the additional contribution from higher gas prices to the electricity and gas component in the Eurozone HICP (which has a weight of around 6%).

The Netherlands

The Netherlands has an abundancy in natural gas and consequently has been a net exporter of the commodity for decades. The Groningen gas field, discovered in 1959, has provided a steady revenue stream for the Dutch economy and the Treasury. However, drilling for gas in Groningen has also caused earthquakes in the northern part of the Netherlands, which have increased in intensity and frequency over the last couple of years. Inevitably, the government decided to scale back on the extraction of gas in Groningen, which will reach a full stop in 2022. Consequently, the Dutch gas supply is increasingly dependent on import from abroad (Figure 11). Moreover, being pretty much autarkic in the supply of natural gas, the entire energy infrastructural revolves around the use of natural gas. This explains why the pass-through of gas prices to consumer prices is higher in the Netherlands (24%) compared to the Eurozone (17%). The combination of the two, i.e. higher dependency on foreign supply and energy infra that hinges on the use of gas, makes the Dutch economy vulnerable to a fluctuation in gas prices.

To assess the potential impact of higher gas prices on the additional energy costs that consumers might face, we use the Dutch 1y forward benchmark gas contract as an instrument and assume it stays at current levels of approximately EUR 40/MWh for the remainder of 2021 and 2022. As the weight of the energy component within total the Dutch consumer basket is 4.3% (with gas expenses making up for 2.9%), a full pass-through of higher gas prices could prop up inflation by 0.3ppts in 2021 and a staggering 1.3ppts in 2021 (see Figure 12).

The average Dutch household currently spends approximately 1,600 euros on energy (of which 1,000 on gas). This means that - in a full pass-through scenario - the current gas prices would raise the energy bill by roughly 600 euros for each household. This is a bleak perspective, given that it will most likely hit low income households, which are also the ones with highest propensity to consume. Indeed, very recent research (in Dutch) shows that 7% of all Dutch households are coping with so-called ‘energy poverty’: high energy expenses, a low income and poorly insulated houses. Moreover, the same research shows that half of all Dutch households live in houses with bad or mediocre insulation standards, but are unable to improve their situation, either because it concerns rental houses or because people simply do not have the money.

That said, we feel that the ‘full pass-through’ scenario is unrealistic, since the Netherlands is able to mitigate any adverse prices effects by relying increasingly on its own supply. Indeed, half of total gas needs in the Netherlands is currently met by domestic sources. In a mitigation scenario, inflation would end up being 0.2ppts higher in 2021 and 0.5ppts higher in 2022 (figure 12); which might still result in a significant jump in households’ energy bills. During the 2022 Budget Debate this week, the Dutch caretaker govt. has announced to allocate EUR 500 million to mitigate the impact of a rising energy bill for households. This is supposed to be realised by lowering the taxes on energy.

Going forward, the most likely strategy for the Netherlands in case of a European gas crisis is to scale back on gas export and to rely more heavily on self-provision. Of course, Dutch energy companies are bound by contracts which have been forged in the past. But politicians will likely crank up the pressure to follow the path of least resistance.

Higher prices fuel a winter of discontent in the UK

In the United Kingdom, not a single market has been left untouched by Brexit. While it is clearly a stretch to argue that Brexit is the source of the UK’s energy crisis, it currently adds an extra layer of price volatility in its energy markets.

Take the UK’s electricity market, which has been decoupled from the continent's internal trading market. Countries that participate in the EU’s internal market use auctions to trade with each other, which continuously balances electricity prices across the continent. With the UK now going its own way, whilst increasingly relying on ‘super-efficient‘ market dynamics, it has become more exposed to significant fluctuations in supply or demand.

These fluctuations make it more challenging to balance the grid, in particular now the makeup of the energy mix changes towards renewables. The UK’s precarious energy situation is entirely reflective of the current resilience-versus-efficiency debate, as we have become keenly aware that disruptions in one part of the world ripple out to affect others.

The gas price surges now threaten the country’s distribution system, which has become increasingly atomized. Many small suppliers seek to make a profit by purchasing energy wholesale and reselling at regulated but higher retail rates. These suppliers typically don’t have the capital to hedge this position.

As the wholesale market is now moving adversely, whilst the Ofgem-regulated rates are sticky and capped (see figure 14) the business model collapses and suppliers fail with it. Customers will be switched to a new supplier, which suddenly has to satisfy demand not budgeted for. That suggests government financial support appears to be required, which eventually needs to be paid back.

The regulator will review the price cap in February, and it will come into effect in April. Unless prices drop rapidly, the potential for a protracted period of higher energy inflation looks likely. This will also have a significant impact on CPI inflation, which might stay around 4% for a few months longer than policy makers had expected. This, in turn, could trigger a rate response from the Bank of England.

One of the key promises of the proponents of Brexit was that it would deliver increased prosperity. In reality, Britain faces shortages, tax hikes, and higher inflation. Even if Brexit isn’t the main cause of most of this, the optics don’t look good at all. Prime Minister Johnson must beware of a new winter of discontent.

Calls for government support may rise with gas

The sharp rise in gas and electricity prices, which is affecting both businesses and households, has already provoked several governments in Europe to intervene. These interventions should dampen the overall impact of rising prices and disruptions, but it is obviously no free lunch.

Indeed, given tight global supply, if demand remains unchanged in Europe due to subsidies obscuring the pricing signal, higher prices will simply be transferred to other economies, many of whom will not be able to afford to match the wealthy EU’s subsidies.

Despite this step being opposed to free-market ideology, we see a number of reasons why EU governments have been quick to step in:

  1. To the extent that higher gas prices are the result of the geopolitical chess game between Germany/Europe and Russia, European governments may be keen to avoid being blackmailed by Moscow; which is an issue that is said to have been raised by Poland –and also the US- at the informal meeting of transport and energy ministers that took place on 22-23 September. That said, ‘humane’ reasons and avoiding a political backlash as a result of the gas crisis is likely to be an all-encompassing driver.
  2. Their interventions may help to avoid significant second order effects. The UK government’s bail-out of US CO2 supplier CF Fertilisers is a case in point. Why would the UK government bail-out a US private company? Because it feared that a halt to CO2 production would cause massive disruption in supply chains, from fizzy drinks to meat.
  3. The past two years have shown the effectiveness and impact of government interventions in the economic process. Whether it is volumes (unemployment) or prices (inflation), everything seems to have become a political choice. Spain’s decision on 14 September to slash energy taxes and impose a temporary windfall tax on the gains of energy companies is a concrete example. The reason here is clearly to limit the impact of rising gas and electricity prices on households. Several other countries have also stepped in already, with Greece providing subsidies to poor families and Italy having supported households already last quarter to make sure electricity bills did not rise more than 10%.
  4. With the covid-19 pandemic not over yet, most governments still enjoy the backing of the central bank, the ECB in this case with its PEPP; as such they can do this without causing significant impact on market/bond yields

In the coming weeks more formal announcements of interventions should be expected. The French government, for example, has already announced it is looking to increase subsidies to poor households, while Italy is looking to rewrite the method to calculate energy bills. Meanwhile, the European Commission has taken up the task to table proposals on how to deal with the surge in energy prices at the EU level. Proposals are expected in the coming weeks, and could well be discussed at the next EU leaders’ summit on 21-22 October. Although the Greek plan to help consumers pay their bills by creating an EU mechanism funded by revenue from extra-ordinary sales of EU carbon emission permits seems unlikely to make the cut, in our view.

The prospect of more government interventions adds an additional layer of complexity to the situation. On the one hand, the economic fall-out from the explosion of gas prices may turn out to be less grave than would otherwise be the case. On the other hand may it prove more difficult to get rid of these policies –if the rise in gas/energy prices turns out be longer lasting/ permanent- and/or could this lead to new distortions elsewhere.

Accelerator or disruptor of the energy transition?

In this piece we show that the rise in gas prices is significant and could have multiple knock-on effects on other markets. If gas prices stay at current elevated levels, we are likely to see a significant increase in inflation compared to our baseline projections. Moreover, we argue that this supply shock is another downside risk to demand further out, as the economy is just recovering from the pandemic shock. Here too, government intervention may well play a key role.

And, geopolitics aside, another key question is whether the current gas crisis could cast a shadow over the much-needed energy transition. In 2021, we again experienced the enormous adverse impact of climate change: soaring temperatures and wild fires in the US, Australia and the South of Europe; floods in Germany, the Netherlands and Belgium. Needless to say that action is needed as soon as possible to make a shift towards renewable and clean energy generation.

From this perspective, the rise in high gas prices might even be good news, as it might act as an accelerator to induce households and firms to lower the energy bill via the insulation of homes and offices. Moreover, it may accelerate the shift by households to green alternatives.

That said, installing solar panels, heat pumps or insulating the attic does not come cheap and the question is whether households in particular have sufficient funds to make the required adaptations to their houses in the short term without additional government support. A European gas crisis might encourage politicians to allocate more funds towards these needs, perhaps via the European Recovery Fund. Bear in mind, also, that the rise in electricity prices due to higher gas prices may also lead to a lower pay-out of subsidies to green energy providers by governments, as these subsidies are often based on the gap between the ‘green’ and the ‘grey’ electricity price. In other words, the current crisis need not be a disrupter of the energy transition, and it may even lead to an acceleration.

In the short-term, however, the imminent depletion of global gas inventories on the back of a cold winter might force energy companies to resort to other sources of energy to heat homes, such as coal or even worse, fuel oil. This would definitely throw a spanner in the works towards a cleaner way of energy generation in the near-term.

To highlight this risk, gas made up a larger share of fossil fuel generation than coal in the eastern US in July despite high prices that tend to "prompt gas-to-coal switching for electricity generation […]" the EIA recently said. "This difference is partially because of a longer-term trend of decreasing capacity for coal-fired electricity generation and increasing natural gas-fired capacity", adding that "Capacity for coal-fired electricity generation has decreased every year since 2011, and gas-fired capacity has increased every year since at least 2009."

Tyler Durden Sun, 09/26/2021 - 14:00

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The Coming Of The Police State In America

The Coming Of The Police State In America

Authored by Jeffrey Tucker via The Epoch Times,

The National Guard and the State Police are now…

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11 hours ago

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March 9, 2024

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The Coming Of The Police State In America

Authored by Jeffrey Tucker via The Epoch Times,

The National Guard and the State Police are now patrolling the New York City subway system in an attempt to do something about the explosion of crime. As part of this, there are bag checks and new surveillance of all passengers. No legislation, no debate, just an edict from the mayor.

Many citizens who rely on this system for transportation might welcome this. It’s a city of strict gun control, and no one knows for sure if they have the right to defend themselves. Merchants have been harassed and even arrested for trying to stop looting and pillaging in their own shops.

The message has been sent: Only the police can do this job. Whether they do it or not is another matter.

Things on the subway system have gotten crazy. If you know it well, you can manage to travel safely, but visitors to the city who take the wrong train at the wrong time are taking grave risks.

In actual fact, it’s guaranteed that this will only end in confiscating knives and other things that people carry in order to protect themselves while leaving the actual criminals even more free to prey on citizens.

The law-abiding will suffer and the criminals will grow more numerous. It will not end well.

When you step back from the details, what we have is the dawning of a genuine police state in the United States. It only starts in New York City. Where is the Guard going to be deployed next? Anywhere is possible.

If the crime is bad enough, citizens will welcome it. It must have been this way in most times and places that when the police state arrives, the people cheer.

We will all have our own stories of how this came to be. Some might begin with the passage of the Patriot Act and the establishment of the Department of Homeland Security in 2001. Some will focus on gun control and the taking away of citizens’ rights to defend themselves.

My own version of events is closer in time. It began four years ago this month with lockdowns. That’s what shattered the capacity of civil society to function in the United States. Everything that has happened since follows like one domino tumbling after another.

It goes like this:

1) lockdown,

2) loss of moral compass and spreading of loneliness and nihilism,

3) rioting resulting from citizen frustration, 4) police absent because of ideological hectoring,

5) a rise in uncontrolled immigration/refugees,

6) an epidemic of ill health from substance abuse and otherwise,

7) businesses flee the city

8) cities fall into decay, and that results in

9) more surveillance and police state.

The 10th stage is the sacking of liberty and civilization itself.

It doesn’t fall out this way at every point in history, but this seems like a solid outline of what happened in this case. Four years is a very short period of time to see all of this unfold. But it is a fact that New York City was more-or-less civilized only four years ago. No one could have predicted that it would come to this so quickly.

But once the lockdowns happened, all bets were off. Here we had a policy that most directly trampled on all freedoms that we had taken for granted. Schools, businesses, and churches were slammed shut, with various levels of enforcement. The entire workforce was divided between essential and nonessential, and there was widespread confusion about who precisely was in charge of designating and enforcing this.

It felt like martial law at the time, as if all normal civilian law had been displaced by something else. That something had to do with public health, but there was clearly more going on, because suddenly our social media posts were censored and we were being asked to do things that made no sense, such as mask up for a virus that evaded mask protection and walk in only one direction in grocery aisles.

Vast amounts of the white-collar workforce stayed home—and their kids, too—until it became too much to bear. The city became a ghost town. Most U.S. cities were the same.

As the months of disaster rolled on, the captives were let out of their houses for the summer in order to protest racism but no other reason. As a way of excusing this, the same public health authorities said that racism was a virus as bad as COVID-19, so therefore it was permitted.

The protests had turned to riots in many cities, and the police were being defunded and discouraged to do anything about the problem. Citizens watched in horror as downtowns burned and drug-crazed freaks took over whole sections of cities. It was like every standard of decency had been zapped out of an entire swath of the population.

Meanwhile, large checks were arriving in people’s bank accounts, defying every normal economic expectation. How could people not be working and get their bank accounts more flush with cash than ever? There was a new law that didn’t even require that people pay rent. How weird was that? Even student loans didn’t need to be paid.

By the fall, recess from lockdown was over and everyone was told to go home again. But this time they had a job to do: They were supposed to vote. Not at the polling places, because going there would only spread germs, or so the media said. When the voting results finally came in, it was the absentee ballots that swung the election in favor of the opposition party that actually wanted more lockdowns and eventually pushed vaccine mandates on the whole population.

The new party in control took note of the large population movements out of cities and states that they controlled. This would have a large effect on voting patterns in the future. But they had a plan. They would open the borders to millions of people in the guise of caring for refugees. These new warm bodies would become voters in time and certainly count on the census when it came time to reapportion political power.

Meanwhile, the native population had begun to swim in ill health from substance abuse, widespread depression, and demoralization, plus vaccine injury. This increased dependency on the very institutions that had caused the problem in the first place: the medical/scientific establishment.

The rise of crime drove the small businesses out of the city. They had barely survived the lockdowns, but they certainly could not survive the crime epidemic. This undermined the tax base of the city and allowed the criminals to take further control.

The same cities became sanctuaries for the waves of migrants sacking the country, and partisan mayors actually used tax dollars to house these invaders in high-end hotels in the name of having compassion for the stranger. Citizens were pushed out to make way for rampaging migrant hordes, as incredible as this seems.

But with that, of course, crime rose ever further, inciting citizen anger and providing a pretext to bring in the police state in the form of the National Guard, now tasked with cracking down on crime in the transportation system.

What’s the next step? It’s probably already here: mass surveillance and censorship, plus ever-expanding police power. This will be accompanied by further population movements, as those with the means to do so flee the city and even the country and leave it for everyone else to suffer.

As I tell the story, all of this seems inevitable. It is not. It could have been stopped at any point. A wise and prudent political leadership could have admitted the error from the beginning and called on the country to rediscover freedom, decency, and the difference between right and wrong. But ego and pride stopped that from happening, and we are left with the consequences.

The government grows ever bigger and civil society ever less capable of managing itself in large urban centers. Disaster is unfolding in real time, mitigated only by a rising stock market and a financial system that has yet to fall apart completely.

Are we at the middle stages of total collapse, or at the point where the population and people in leadership positions wise up and decide to put an end to the downward slide? It’s hard to know. But this much we do know: There is a growing pocket of resistance out there that is fed up and refuses to sit by and watch this great country be sacked and taken over by everything it was set up to prevent.

Tyler Durden Sat, 03/09/2024 - 16:20

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Another beloved brewery files Chapter 11 bankruptcy

The beer industry has been devastated by covid, changing tastes, and maybe fallout from the Bud Light scandal.

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16 hours ago

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March 9, 2024

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Before the covid pandemic, craft beer was having a moment. Most cities had multiple breweries and taprooms with some having so many that people put together the brewery version of a pub crawl.

It was a period where beer snobbery ruled the day and it was not uncommon to hear bar patrons discuss the makeup of the beer the beer they were drinking. This boom period always seemed destined for failure, or at least a retraction as many markets seemed to have more craft breweries than they could support.

Related: Fast-food chain closes more stores after Chapter 11 bankruptcy

The pandemic, however, hastened that downfall. Many of these local and regional craft breweries counted on in-person sales to drive their business. 

And while many had local and regional distribution, selling through a third party comes with much lower margins. Direct sales drove their business and the pandemic forced many breweries to shut down their taprooms during the period where social distancing rules were in effect.

During those months the breweries still had rent and employees to pay while little money was coming in. That led to a number of popular beermakers including San Francisco's nationally-known Anchor Brewing as well as many regional favorites including Chicago’s Metropolitan Brewing, New Jersey’s Flying Fish, Denver’s Joyride Brewing, Tampa’s Zydeco Brew Werks, and Cleveland’s Terrestrial Brewing filing bankruptcy.

Some of these brands hope to survive, but others, including Anchor Brewing, fell into Chapter 7 liquidation. Now, another domino has fallen as a popular regional brewery has filed for Chapter 11 bankruptcy protection.

Overall beer sales have fallen.

Image source: Shutterstock

Covid is not the only reason for brewery bankruptcies

While covid deserves some of the blame for brewery failures, it's not the only reason why so many have filed for bankruptcy protection. Overall beer sales have fallen driven by younger people embracing non-alcoholic cocktails, and the rise in popularity of non-beer alcoholic offerings,

Beer sales have fallen to their lowest levels since 1999 and some industry analysts

"Sales declined by more than 5% in the first nine months of the year, dragged down not only by the backlash and boycotts against Anheuser-Busch-owned Bud Light but the changing habits of younger drinkers," according to data from Beer Marketer’s Insights published by the New York Post.

Bud Light parent Anheuser Busch InBev (BUD) faced massive boycotts after it partnered with transgender social media influencer Dylan Mulvaney. It was a very small partnership but it led to a right-wing backlash spurred on by Kid Rock, who posted a video on social media where he chastised the company before shooting up cases of Bud Light with an automatic weapon.

Another brewery files Chapter 11 bankruptcy

Gizmo Brew Works, which does business under the name Roth Brewing Company LLC, filed for Chapter 11 bankruptcy protection on March 8. In its filing, the company checked the box that indicates that its debts are less than $7.5 million and it chooses to proceed under Subchapter V of Chapter 11. 

"Both small business and subchapter V cases are treated differently than a traditional chapter 11 case primarily due to accelerated deadlines and the speed with which the plan is confirmed," USCourts.gov explained. 

Roth Brewing/Gizmo Brew Works shared that it has 50-99 creditors and assets $100,000 and $500,000. The filing noted that the company does expect to have funds available for unsecured creditors. 

The popular brewery operates three taprooms and sells its beer to go at those locations.

"Join us at Gizmo Brew Works Craft Brewery and Taprooms located in Raleigh, Durham, and Chapel Hill, North Carolina. Find us for entertainment, live music, food trucks, beer specials, and most importantly, great-tasting craft beer by Gizmo Brew Works," the company shared on its website.

The company estimates that it has between $1 and $10 million in liabilities (a broad range as the bankruptcy form does not provide a space to be more specific).

Gizmo Brew Works/Roth Brewing did not share a reorganization or funding plan in its bankruptcy filing. An email request for comment sent through the company's contact page was not immediately returned.

 

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Government

Students lose out as cities and states give billions in property tax breaks to businesses − draining school budgets and especially hurting the poorest students

An estimated 95% of US cities provide economic development tax incentives to woo corporate investors, taking billions away from schools.

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2 days ago

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March 8, 2024

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Exxon Mobil Corp.'s campus in East Baton Rouge Parish, left, received millions in tax abatements to the detriment of local schools, right. Barry Lewis/Getty Images, Tjean314/Wikimedia

Built in 1910, James Elementary is a three-story brick school in Kansas City, Missouri’s historic Northeast neighborhood, with a bright blue front door framed by a sand-colored stone arch adorned with a gargoyle. As bustling students and teachers negotiate a maze of gray stairs with worn wooden handrails, Marjorie Mayes, the school’s principal, escorts a visitor across uneven blue tile floors on the ground floor to a classroom with exposed brick walls and pipes. Bubbling paint mars some walls, evidence of the water leaks spreading inside the aging building.

“It’s living history,” said Mayes during a mid-September tour of the building. “Not the kind of living history we want.”

The district would like to tackle the US$400 million in deferred maintenance needed to create a 21st century learning environment at its 35 schools – including James Elementary – but it can’t. It doesn’t have the money.

Property tax redirect

The lack of funds is a direct result of the property tax breaks that Kansas City lavishes on companies and developers that do business there. The program is supposed to bring in new jobs and business but instead has ended up draining civic coffers and starving schools. Between 2017 and 2023, the Kansas City school district lost $237.3 million through tax abatements.

Kansas City is hardly an anomaly. An estimated 95% of U.S. cities provide economic development tax incentives to woo corporate investors. The upshot is that billions have been diverted from large urban school districts and from a growing number of small suburban and rural districts. The impact is seen in districts as diverse as Chicago and Cleveland, Hillsboro, Oregon, and Storey County, Nevada.

The result? A 2021 review of 2,498 financial statements from school districts across 27 states revealed that, in 2019 alone, at least $2.4 billion was diverted to fund tax incentives. Yet that substantial figure still downplays the magnitude of the problem, because three-quarters of the 10,370 districts analyzed did not provide any information on tax abatement agreements.

Tax abatement programs have long been controversial, pitting states and communities against one another in beggar-thy-neighbor contests. Their economic value is also, at best, unclear: Studies show most companies would have made the same location decision without taxpayer subsidies. Meanwhile, schools make up the largest cost item in these communities, meaning they suffer most when companies are granted breaks in property taxes.

A three-month investigation by The Conversation and three scholars with expertise in economic development, tax laws and education policy shows that the cash drain from these programs is not equally shared by schools in the same communities. At the local level, tax abatements and exemptions often come at the cost of critical funding for school districts that disproportionately serve students from low-income households and who are racial minorities.

In Missouri, for example, in 2022 nearly $1,700 per student was redirected from Kansas City public and charter schools, while between $500 and $900 was redirected from wealthier, whiter Northland schools on the north side of the river in Kansas City and in the suburbs beyond. Other studies have found similar demographic trends elsewhere, including New York state, South Carolina and Columbus, Ohio.

The funding gaps produced by abated money often force schools to delay needed maintenance, increase class sizes, lay off teachers and support staff and even close outright. Schools also struggle to update or replace outdated technology, books and other educational resources. And, amid a nationwide teacher shortage, schools under financial pressures sometimes turn to inexperienced teachers who are not fully certified or rely too heavily on recruits from overseas who have been given special visa status.

Lost funding also prevents teachers and staff, who often feed, clothe and otherwise go above and beyond to help students in need, from earning a living wage. All told, tax abatements can end up harming a community’s value, with constant funding shortfalls creating a cycle of decline.

Incentives, payoffs and guarantees

Perversely, some of the largest beneficiaries of tax abatements are the politicians who publicly boast of handing out the breaks despite the harm to poorer communities. Incumbent governors have used the incentives as a means of taking credit for job creation, even when the jobs were coming anyway.

“We know that subsidies don’t work,” said Elizabeth Marcello, a doctoral lecturer at Hunter College who studies governmental planning and policy and the interactions between state and local governments. “But they are good political stories, and I think that’s why politicians love them so much.”

Academic research shows that economic development incentives are ineffective most of the time – and harm school systems.

While some voters may celebrate abatements, parents can recognize the disparities between school districts that are created by the tax breaks. Fairleigh Jackson pointed out that her daughter’s East Baton Rouge third grade class lacks access to playground equipment.

The class is attending school in a temporary building while their elementary school undergoes a two-year renovation.

The temporary site has some grass and a cement slab where kids can play, but no playground equipment, Jackson said. And parents needed to set up an Amazon wish list to purchase basic equipment such as balls, jump ropes and chalk for students to use. The district told parents there would be no playground equipment due to a lack of funds, then promised to install equipment, Jackson said, but months later, there is none.

Cement surface surrounded by a fence with grass beyond. There's no playground equipment..
The temporary site where Fairleigh Jackson’s daughter goes to school in East Baton Rouge Parish lacks playground equipment. Fairleigh Jackson, CC BY-ND

Jackson said it’s hard to complain when other schools in the district don’t even have needed security measures in place. “When I think about playground equipment, I think that’s a necessary piece of child development,” Jackson said. “Do we even advocate for something that should be a daily part of our kids’ experience when kids’ safety isn’t being funded?”

Meanwhile, the challenges facing administrators 500-odd miles away at Atlanta Public Schools are nothing if not formidable: The district is dealing with chronic absenteeism among half of its Black students, many students are experiencing homelessness, and it’s facing a teacher shortage.

At the same time, Atlanta is showering corporations with tax breaks. The city has two bodies that dole them out: the Development Authority of Fulton County, or DAFC, and Invest Atlanta, the city’s economic development agency. The deals handed out by the two agencies have drained $103.8 million from schools from fiscal 2017 to 2022, according to Atlanta school system financial statements.

What exactly Atlanta and other cities and states are accomplishing with tax abatement programs is hard to discern. Fewer than a quarter of companies that receive breaks in the U.S. needed an incentive to invest, according to a 2018 study by the Upjohn Institute for Employment Research, a nonprofit research organization.

This means that at least 75% of companies received tax abatements when they’re not needed – with communities paying a heavy price for economic development that sometimes provides little benefit.

In Kansas City, for example, there’s no guarantee that the businesses that do set up shop after receiving a tax abatement will remain there long term. That’s significant considering the historic border war between the Missouri and Kansas sides of Kansas City – a competition to be the most generous to the businesses, said Jason Roberts, president of the Kansas City Federation of Teachers and School-Related Personnel. Kansas City, Missouri, has a 1% income tax on people who work in the city, so it competes for as many workers as possible to secure that earnings tax, Roberts said.

Under city and state tax abatement programs, companies that used to be in Kansas City have since relocated. The AMC Theaters headquarters, for example, moved from the city’s downtown to Leawood, Kansas, about a decade ago, garnering some $40 million in Promoting Employment Across Kansas tax incentives.

Roberts said that when one side’s financial largesse runs out, companies often move across the state line – until both states decided in 2019 that enough was enough and declared a cease-fire.

But tax breaks for other businesses continue. “Our mission is to grow the economy of Kansas City, and application of tools such as tax exemptions are vital to achieving that mission, said Jon Stephens, president and CEO of Port KC, the Kansas City Port Authority. The incentives speed development, and providing them "has resulted in growth choosing KC versus other markets,” he added.

In Atlanta, those tax breaks are not going to projects in neighborhoods that need help attracting development. They have largely been handed out to projects that are in high demand areas of the city, said Julian Bene, who served on Invest Atlanta’s board from 2010 to 2018. In 2019, for instance, the Fulton County development authority approved a 10-year, $16 million tax abatement for a 410-foot-tall, 27,000-square-foot tower in Atlanta’s vibrant Midtown business district. The project included hotel space, retail space and office space that is now occupied by Google and Invesco.

In 2021, a developer in Atlanta pulled its request for an $8 million tax break to expand its new massive, mixed-use Ponce City Market development in the trendy Beltline neighborhood with an office tower and apartment building. Because of community pushback, the developer knew it likely did not have enough votes from the commission for approval, Bene said. After a second try for $5 million in lower taxes was also rejected, the developer went ahead and built the project anyway.

Invest Atlanta has also turned down projects in the past, Bene said. Oftentimes, after getting rejected, the developer goes back to the landowner and asks for a better price to buy the property to make their numbers work, because it was overvalued at the start.

Trouble in Philadelphia

On Thursday, Oct. 26, 2023, an environmental team was preparing Southwark School in Philadelphia for the winter cold. While checking an attic fan, members of the team saw loose dust on top of flooring that contained asbestos. The dust that certainly was blowing into the floors below could contain the cancer-causing agent. Within a day, Southwark was closed – the seventh Philadelphia school temporarily shuttered since the previous academic year because of possible asbestos contamination.

A 2019 inspection of the John L Kinsey school in Philadelphia found asbestos in plaster walls, floor tiles, radiator insulation and electrical panels. Asbestos is a major problem for Philadelphia’s public schools. The district needs $430 million to clean up the asbestos, lead, and other environmental hazards that place the health of students, teachers and staff at risk. And that is on top of an additional $2.4 billion to fix failing and damaged buildings.

Yet the money is not available. Matthew Stem, a former district official, testified in a 2023 lawsuit about financing of Pennsylvania schools that the environmental health risks cannot be addressed until an emergency like at Southwark because “existing funding sources are not sufficient to remediate those types of issues.”

Meanwhile, the city keeps doling out abatements, draining money that could have gone toward making Philadelphia schools safer. In the fiscal year ending June 2022, such tax breaks cost the school district $118 million – more than 25% of the total amount needed to remove the asbestos and other health dangers. These abatements take 31 years to break even, according to the city’s own scenario impact analyses.

Huge subsets of the community – primarily Black, Brown, poor or a combination – are being “drastically impacted” by the exemptions and funding shortfalls for the school district, said Kendra Brooks, a Philadelphia City Council member. Schools and students are affected by mold, asbestos and lead, and crumbling infrastructure, as well as teacher and staffing shortages – including support staff, social workers and psychologists.

More than half the district’s schools that lacked adequate air conditioning – 87 schools – had to go to half days during the first week of the 2023 school year because of extreme heat. Poor heating systems also leave the schools cold in the winter. And some schools are overcrowded, resulting in large class sizes, she said.

Front of a four-story brick school building with tall windows, some with air-conditioners
Horace Furness High School in Philadelphia, where hot summers have temporarily closed schools that lack air conditioning. Nick-philly/Wikimedia, CC BY-SA

Teachers and researchers agree that a lack of adequate funding undermines educational opportunities and outcomes. That’s especially true for children living in poverty. A 2016 study found that a 10% increase in per-pupil spending each year for all 12 years of public schooling results in nearly one-third of a year of more education, 7.7% higher wages and a 3.2% reduction in annual incidence of adult poverty. The study estimated that a 21.7% increase could eliminate the high school graduation gap faced by children from low-income families.

More money for schools leads to more education resources for students and their teachers. The same researchers found that spending increases were associated with reductions in student-to-teacher ratios, increases in teacher salaries and longer school years. Other studies yielded similar results: School funding matters, especially for children already suffering the harms of poverty.

While tax abatements themselves are generally linked to rising property values, the benefits are not evenly distributed. In fact, any expansion of the tax base due to new property construction tends to be outside of the county granting the tax abatement. For families in school districts with the lost tax revenues, their neighbors’ good fortune likely comes as little solace. Meanwhile, a poorly funded education system is less likely to yield a skilled and competitive workforce, creating longer-term economic costs that make the region less attractive for businesses and residents.

“There’s a head-on collision here between private gain and the future quality of America’s workforce,” said Greg LeRoy, executive director at Good Jobs First, a Washington, D.C., advocacy group that’s critical of tax abatement and tracks the use of economic development subsidies.

Three-story school building with police officers out front and traffic lights in the foreground
Roxborough High School in Philadelphia. AP Photo/Matt Rourke

As funding dwindles and educational quality declines, additional families with means often opt for alternative educational avenues such as private schooling, home-schooling or moving to a different school district, further weakening the public school system.

Throughout the U.S., parents with the power to do so demand special arrangements, such as selective schools or high-track enclaves that hire experienced, fully prepared teachers. If demands aren’t met, they leave the district’s public schools for private schools or for the suburbs. Some parents even organize to splinter their more advantaged, and generally whiter, neighborhoods away from the larger urban school districts.

Those parental demands – known among scholars as “opportunity hoarding” – may seem unreasonable from the outside, but scarcity breeds very real fears about educational harms inflicted on one’s own children. Regardless of who’s to blame, the children who bear the heaviest burden of the nation’s concentrated poverty and racialized poverty again lose out.

Rethinking in Philadelphia and Riverhead

Americans also ask public schools to accomplish Herculean tasks that go far beyond the education basics, as many parents discovered at the onset of the pandemic when schools closed and their support for families largely disappeared.

A school serving students who endure housing and food insecurity must dedicate resources toward children’s basic needs and trauma. But districts serving more low-income students spend less per student on average, and almost half the states have regressive funding structures.

Facing dwindling resources for schools, several cities have begun to rethink their tax exemption programs.

The Philadelphia City Council recently passed a scale-back on a 10-year property tax abatement by decreasing the percentage of the subsidy over that time. But even with that change, millions will be lost to tax exemptions that could instead be invested in cash-depleted schools. “We could make major changes in our schools’ infrastructure, curriculum, staffing, staffing ratios, support staff, social workers, school psychologists – take your pick,” Brooks said.

Other cities looking to reform tax abatement programs are taking a different approach. In Riverhead, New York, on Long Island, developers or project owners can be granted exemptions on their property tax and allowed instead to shell out a far smaller “payment in lieu of taxes,” or PILOT. When the abatement ends, most commonly after 10 years, the businesses then will pay full property taxes.

At least, that’s the idea, but the system is far from perfect. Beneficiaries of the PILOT program have failed to pay on time, leaving the school board struggling to fill a budget hole. Also, the payments are not equal to the amount they would receive for property taxes, with millions of dollars in potential revenue over a decade being cut to as little as a few hundred thousand. On the back end, if a business that’s subsidized with tax breaks fails after 10 years, the projected benefits never emerge.

And when the time came to start paying taxes, developers have returned to the city’s Industrial Development Agency with hat in hand, asking for more tax breaks. A local for-profit aquarium, for example, was granted a 10-year PILOT program break by Riverhead in 1999; it has received so many extensions that it is not scheduled to start paying full taxes until 2031 – 22 years after originally planned.

Kansas City border politics

Like many cities, Kansas City has a long history of segregation, white flight and racial redlining, said Kathleen Pointer, senior policy strategist for Kansas City Public Schools.

James Elementary in Kansas City, Mo. Danielle McLean, CC BY-ND

Troost Avenue, where the Kansas City Public Schools administrative office is located, serves as the city’s historic racial dividing line, with wealthier white families living in the west and more economically disadvantaged people of color in the east. Most of the district’s schools are located east of Troost, not west.

Students on the west side “pretty much automatically funnel into the college preparatory middle school and high schools,” said The Federation of Teachers’ Roberts. Those schools are considered signature schools that are selective and are better taken care of than the typical neighborhood schools, he added.

The school district’s tax levy was set by voters in 1969 at 3.75%. But successive attempts over the next few decades to increase the levy at the ballot box failed. During a decadeslong desegregation lawsuit that was eventually resolved through a settlement agreement in the 1990s, a court raised the district’s levy rate to 4.96% without voter approval. The levy has remained at the same 4.96% rate since.

Meanwhile, Kansas City is still distributing 20-year tax abatements to companies and developers for projects. The district calculated that about 92% of the money that was abated within the school district’s boundaries was for projects within the whiter west side of the city, Pointer said.

“Unfortunately, we can’t pick or choose where developers build,” said Meredith Hoenes, director of communications for Port KC. “We aren’t planning and zoning. Developers typically have plans in place when they knock on our door.”

In Kansas City, several agencies administer tax incentives, allowing developers to shop around to different bodies to receive one. Pointer said he believes the Port Authority is popular because they don’t do a third-party financial analysis to prove that the developers need the amount that they say they do.

With 20-year abatements, a child will start pre-K and graduate high school before seeing the benefits of a property being fully on the tax rolls, Pointer said. Developers, meanwhile, routinely threaten to build somewhere else if they don’t get the incentive, she said.

In 2020, BlueScope Construction, a company that had received tax incentives for nearly 20 years and was about to roll off its abatement, asked for another 13 years and threatened to move to another state if it didn’t get it. At the time, the U.S. was grappling with a racial reckoning following the murder of George Floyd, who was killed by a Minneapolis police officer.

“That was a moment for Kansas City Public Schools where we really drew a line in the sand and talked about incentives as an equity issue,” Pointer said.

After the district raised the issue – tying the incentives to systemic racism – the City Council rejected BlueScope’s bid and, three years later, it’s still in Kansas City, fully on the tax rolls, she said. BlueScope did not return multiple requests for comment.

Recently, a multifamily housing project was approved for a 20-year tax abatement by the Port Authority of Kansas City at Country Club Plaza, an outdoor shopping center in an affluent part of the city. The housing project included no affordable units. “This project was approved without any independent financial analysis proving that it needed that subsidy,” Pointer said.

All told, the Kansas City Public Schools district faces several shortfalls beyond the $400 million in deferred maintenance, Superintendent Jennifer Collier said. There are staffing shortages at all positions: teachers, paraprofessionals and support staff. As in much of the U.S., the cost of housing is surging. New developments that are being built do not include affordable housing, or when they do, the units are still out of reach for teachers.

That’s making it harder for a district that already loses about 1 in 5 of its teachers each year to keep or recruit new ones, who earn an average of only $46,150 their first year on the job, Collier said.

East Baton Rouge and the industrial corridor

It’s impossible to miss the tanks, towers, pipes and industrial structures that incongruously line Baton Rouge’s Scenic Highway landscape. They’re part of Exxon Mobil Corp.’s campus, home of the oil giant’s refinery in addition to chemical and plastics plants.

Aerial view of industrial buildings along a river
Exxon Mobil Corp.’s Baton Rouge campus occupies 3.28 square miles. AP Photo/Gerald Herbert

Sitting along the Mississippi River, the campus has been a staple of Louisiana’s capital for over 100 years. It’s where 6,000 employees and contractors who collectively earn over $400 million annually produce 522,000 barrels of crude oil per day when at full capacity, as well as the annual production and manufacture of 3 billion pounds of high-density polyethylene and polypropylene and 6.6 billion pounds of petrochemical products. The company posted a record-breaking $55.7 billion in profits in 2022 and $36 billion in 2023.

Across the street are empty fields and roads leading into neighborhoods that have been designated by the U.S. Department of Agriculture as a low-income food desert. A mile drive down the street to Route 67 is a Dollar General, fast-food restaurants, and tiny, rundown food stores. A Hi Nabor Supermarket is 4 miles away.

East Baton Rouge Parish’s McKinley High School, a 12-minute drive from the refinery, serves a student body that is about 80% Black and 85% poor. The school, which boasts famous alums such as rapper Kevin Gates, former NBA player Tyrus Thomas and Presidential Medal of Freedom recipient Gardner C. Taylor, holds a special place in the community, but it has been beset by violence and tragedy lately. Its football team quarterback, who was killed days before graduation in 2017, was among at least four of McKinley’s students who have been shot or murdered over the past six years.

The experience is starkly different at some of the district’s more advantaged schools, including its magnet programs open to high-performing students.

Black-and-white outline of Louisiana showing the parishes, with one, near the bottom right, filled in red
East Baton Rouge Parish, marked in red, includes an Exxon Mobil Corp. campus and the city of Baton Rouge. David Benbennick/Wikimedia

Baton Rouge is a tale of two cities, with some of the worst outcomes in the state for education, income and mortality, and some of the best outcomes. “It was only separated by sometimes a few blocks,” said Edgar Cage, the lead organizer for the advocacy group Together Baton Rouge. Cage, who grew up in the city when it was segregated by Jim Crow laws, said the root cause of that disparity was racism.

“Underserved kids don’t have a path forward” in East Baton Rouge public schools, Cage said.

A 2019 report from the Urban League of Louisiana found that economically disadvantaged African American and Hispanic students are not provided equitable access to high-quality education opportunities. That has contributed to those students underperforming on standardized state assessments, such as the LEAP exam, being unprepared to advance to higher grades and being excluded from high-quality curricula and instruction, as well as the highest-performing schools and magnet schools.

“Baton Rouge is home to some of the highest performing schools in the state,” according to the report. “Yet the highest performing schools and schools that have selective admissions policies often exclude disadvantaged students and African American and Hispanic students.”

Dawn Collins, who served on the district’s school board from 2016 to 2022, said that with more funding, the district could provide more targeted interventions for students who were struggling academically or additional support to staff so they can better assist students with greater needs.

But for decades, Louisiana’s Industrial Ad Valorem Tax Exemption Program, or ITEP, allowed for 100% property tax exemptions for industrial manufacturing facilities, said Erin Hansen, the statewide policy analyst at Together Louisiana, a network of 250 religious and civic organizations across the state that advocates for grassroots issues, including tax fairness.

The ITEP program was created in the 1930s through a state constitutional amendment, allowing companies to bypass a public vote and get approval for the exemption through the governor-appointed Board of Commerce and Industry, Hansen said. For over 80 years, that board approved nearly all applications that it received, she said.

Since 2000, Louisiana has granted a total of $35 billion in corporate property tax breaks for 12,590 projects.

Louisiana’s executive order

A few efforts to reform the program over the years have largely failed. But in 2016, Gov. John Bel Edwards signed an executive order that slightly but importantly tweaked the system. On top of the state board vote, the order gave local taxing bodies – such as school boards, sheriffs and parish or city councils – the ability to vote on their own individual portions of the tax exemptions. And in 2019 the East Baton Rouge Parish School Board exercised its power to vote down an abatement.

Throughout the U.S., school boards’ power over the tax abatements that affect their budgets vary, and in some states, including Georgia, Kansas, Nevada, New Jersey and South Carolina, school boards lack any formal ability to vote or comment on tax abatement deals that affect them.

Edwards’ executive order also capped the maximum exemption at 80% and tightened the rules so routine capital investments and maintenance were no longer eligible, Hansen said. A requirement concerning job creation was also put in place.

Concerned residents and activists, led by Together Louisiana and sister group Together Baton Rouge, rallied around the new rules and pushed back against the billion-dollar corporation taking more tax money from the schools. In 2019, the campaign worked: the school board rejected a $2.9 million property tax break bid by Exxon Mobil.

After the decision, Exxon Mobil reportedly described the city as “unpredictable.”

However, members of the business community have continued to lobby for the tax breaks, and they have pushed back against further rejections. In fact, according to Hansen, loopholes were created during the rulemaking process around the governor’s executive order that allowed companies to weaken its effectiveness.

In total, 223 Exxon Mobil projects worth nearly $580 million in tax abatements have been granted in the state of Louisiana under the ITEP program since 2000.

“ITEP is needed to compete with other states – and, in ExxonMobil’s case, other countries,” according to Exxon Mobil spokesperson Lauren Kight.

She pointed out that Exxon Mobil is the largest property taxpayer for the EBR school system, paying more than $46 million in property taxes in EBR parish in 2022 and another $34 million in sales taxes.

A new ITEP contract won’t decrease this existing tax revenue, Kight added. “Losing out on future projects absolutely will.”

The East Baton Rouge Parish School Board has continued to approve Exxon Mobil abatements, passing $46.9 million between 2020 and 2022. Between 2017 and 2023, the school district has lost $96.3 million.

Taxes are highest when industrial buildings are first built. Industrial property comes onto the tax rolls at 40% to 50% of its original value in Louisiana after the initial 10-year exemption, according to the Ascension Economic Development Corp.

Exxon Mobil received its latest tax exemption, $8.6 million over 10 years – an 80% break – in October 2023 for $250 million to install facilities at the Baton Rouge complex that purify isopropyl alcohol for microchip production and that create a new advanced recycling facility, allowing the company to address plastic waste. The project created zero new jobs.

The school board approved it by a 7-2 vote after a long and occasionally contentious board meeting.

“Does it make sense for Louisiana and other economically disadvantaged states to kind of compete with each other by providing tax incentives to mega corporations like Exxon Mobil?” said EBR School Board Vice President Patrick Martin, who voted for the abatement. “Probably, in a macro sense, it does not make a lot of sense. But it is the program that we have.”

Obviously, Exxon Mobil benefits, he said. “The company gets a benefit in reducing the property taxes that they would otherwise pay on their industrial activity that adds value to that property.” But the community benefits from the 20% of the property taxes that are not exempted, he said.

“I believe if we don’t pass it, over time the investments will not come and our district as a whole will have less money,” he added.

In 2022, a year when Exxon Mobil made a record $55.7 billion, the company asked for a 10-year, 80% property tax break from the cash-starved East Baton Rouge Parish school district. A lively debate ensued.

Meanwhile, the district’s budgetary woes are coming to a head. Bus drivers staged a sickout at the start of the school year, refusing to pick up students – in protest of low pay and not having buses equipped with air conditioning amid a heat wave. The district was forced to release students early, leaving kids stranded without a ride to school, before it acquiesced and provided the drivers and other staff one-time stipends and purchased new buses with air conditioning.

The district also agreed to reestablish transfer points as a temporary response to the shortages. But that transfer-point plan has historically resulted in students riding on the bus for hours and occasionally missing breakfast when the bus arrives late, according to Angela Reams-Brown, president of the East Baton Rouge Federation of Teachers. The district plans to purchase or lease over 160 buses and solve its bus driver shortage next year, but the plan could lead to a budget crisis.

A teacher shortage looms as well, because the district is paying teachers below the regional average. At the school board meeting, Laverne Simoneaux, an ELL specialist at East Baton Rouge’s Woodlawn Elementary, said she was informed that her job was not guaranteed next year since she’s being paid through federal COVID-19 relief funds. By receiving tax exemptions, Exxon Mobil was taking money from her salary to deepen their pockets, she said.

A young student in the district told the school board that the money could provide better internet access or be used to hire someone to pick up the glass and barbed wire in the playground. But at least they have a playground – Hayden Crockett, a seventh grader at Sherwood Middle Academic Magnet School, noted that his sister’s elementary school lacked one.

“If it wasn’t in the budget to fund playground equipment, how can it also be in the budget to give one of the most powerful corporations in the world a tax break?” Crockett said. “The math just ain’t mathing.”

Christine Wen worked for the nonprofit organization Good Jobs First from June 2019 to May 2022 where she helped collect tax abatement data.

Nathan Jensen has received funding from the John and Laura Arnold Foundation, the Smith Richardson Foundation, the Ewing Marion Kauffman Foundation and the Washington Center for Equitable Growth. He is a Senior Fellow at the Niskanen Center.

Danielle McLean and Kevin Welner do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.

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