Reasonable Approaches, Reality Checks And The State Income Tax Debate

In the last couple of days, since Sen. Rob Marionneaux’s bill to phase out Louisiana’s income tax made its way through the Senate on a 35-4 vote (with an amendment asking for a study of the fiscal impact and a plan for handling the displaced revenue), there has been a good bit of clucking from the state’s punditocracy about the idea.

Sam Hanna from the Ouachita Citizen was one example:

There’s no doubt there exist wasteful spending throughout government at all levels – local, state, federal. There’s no doubt as well that government at all levels has grown too big for its britches, so to speak.

When we entertain a proposal, though, to abolish income taxes and reduce tax revenues by $3 billion we must be prepared to cut $3 billion in spending or be prepared to raise taxes elsewhere. Since the general public isn’t too hip on raising taxes these days, which arm of government do we cut and how much do we cut from it?

It can be argued within reason that the only real savings to be realized from reducing the size and scope of government must come at the expense of education, corrections and health care. If that’s the case, which colleges and universities are we going to close to help offset a $3 billion reduction in tax revenues? Which health care services do we discontinue? How many prisons do we shut down and which prisoners do we set free?

It’s safe to assume the general public in Louisiana has no desire to witness the closing of colleges and universities, and no one wants to see anyone do without proper health care. And you can bet a mortgage payment the general public would raise Cane if the state turned prisoners loose to roam the streets freely.

Make no mistake, I welcome the opportunity to pay less taxes, corporate and personal. After all, who doesn’t want to a tax cut?

But if we’re going to seriously entertain abolishing all income taxes in Louisiana, we must take our time and prepare a realistic and reasonable plan to make it happen without wrecking people’s lives. If that means we are to revisit every constitutionally and statutorily dedicated expenditure, so be it. If that means we are to revisit every tax exemption that’s made available to the business community and individuals as well, including ending some of those exemptions, so be it. If that means we are to consider other revenue enhancers to offset the loss of revenues from abolishing income taxes, so be it.

And Barry Erwin from the Council for a Better Louisiana said something similar:

[I]t’s time to put the brakes on this discussion and take a reality check for a moment. Consider these facts:

  • In 2008, the budget of state general fund revenues was about $9.7 billion.
  • Three years later our current budget for 2011 is about $7.7 billion.
  • That’s a $2 billion loss in revenue or a budget cut of about 22%.
  • If we eliminated state personal and corporate income taxes for this year, the loss in revenue would be nearly $2.7 billion.

You don’t need to do much math to figure out the impact that would have. At a time when lawmakers are still struggling to balance next year’s budget in a way that doesn’t severely impact higher education, health care, state police and state prisons, does anyone really think those are cuts Louisiana can realistically sustain? Hardly.

Sure, it’s true when they say there are a handful of states that don’t have state income taxes. Alaska and Wyoming have so few people and receive so much revenue from mineral resources they don’t even have to think about income taxes. But the other states, like Texas and Florida, that don’t have income taxes tend to rely heavily on other taxes, such as property taxes to fund state government. Louisiana has no state property tax and is a state with the most generous homestead exemption in the country for local property taxes. It’s pretty hard to envision any of that changing. It’s fair to look at taxes in other states, but if we do, we need to look at all their taxes, not just one.

And we should remember, it’s not like we’ve exactly been raising taxes in Louisiana. To the contrary, over the last several years we have cut hundreds of millions of dollars in state income taxes, sales taxes and a variety of business taxes – a fact that seems to be largely forgotten. The point is that Louisiana is not a heavily taxed state for its citizens and simply cutting a couple of billion dollars in income taxes on top of the other reductions that have occurred in state spending isn’t tax reform, it isn’t spending reform and it isn’t very smart.

Erwin also suggests that nobody took the proposals by Marionneaux and state Rep. Hunter Greene to kill the income tax seriously. That’s a bit of an eye-opener, frankly; bills to wipe out the income tax come about practically every session and they always get sizable support. If you’re not taking them seriously you’re not paying attention. If anything, by now it should be fairly apparent that a repeal of the income tax is inevitable. More on that in a minute.

Look, Marionneaux’s income-tax bill is a Trojan Horse. Marionneaux is using a repeal of the income tax as a sugar-coating for a run at an oil-processing tax, which is a non-starter and a drop-dead horrible idea, and he’s also trying to get rid of hundreds of millions of dollars – or more – in tax credits and deductions and other breaks for business in the state – which is a less-horrible idea, but not for the reasons Marionneaux is trying to implement it.

In short, he’s trying to kill the state income tax so that he can come off as the best buddy of Louisiana’s middle class. And that’s all well and good, but his prescription for replacing the revenue the income tax brings in will be to increase the burden the business community bears in the state. And that’s precisely the wrong answer for a state which desperately needs to crank up its economic engine and start growing its population after more than a decade of lots of folks leaving and not many coming in. Marionneaux isn’t exactly the best friend of the middle class if he runs off all the businesses the middle class people work for.

But Texas doesn’t have an income tax, and Texas has a booming economy smack dab in the middle of a country in the throes of what looks a lot like a depression. Florida doesn’t have an income tax either, and while Florida’s economy is actually uglier than Louisiana’s is at present that has only been the case over the last few years – for a good three decades prior to 2007 or so there was no comparison.

People who have skills in enough demand to earn a sufficient income for state taxation are by nature going to be attracted to places where that income isn’t appropriated by somebody else. And in the South, where Texas, Louisiana and Florida are all situated, the prevailing attitude holds that people capable of earning good incomes are better suited to use that income to achieve good results than the government is – so it’s a poor allocation of resources to tax those people any more than is absolutely necessary.

Over the two decades and change since the oil patch collapsed in the mid-1980’s, Louisiana has largely stood on the sidelines as other Southern states have transformed from sleepy backwaters to some of the major drivers of American economic growth. And it’s been perplexing; Louisiana’s natural resources dwarf those of a Georgia or Alabama or even Tennessee.

Now, given that the national economy is going to have to retrench itself into a more basic orientation and away from busted sectors like housing or financial services, which some of the “boomier” states have seen growth in, we’re in better shape than we’re giving ourselves credit for; if and when the Obama administration can be turned out in favor of a White House which is actually serious about domestic energy the offshore Gulf, the Haynesville Shale and the Tuscaloosa Marine Shale could make this place an even greater oil and gas mecca than it was in the glory days when Edwin Edwards and his goons were stealing the state blind and nobody even cared much.

But that’s betting on the come at this point, and whether or not the energy industry roars back to life in Louisiana – which we think is coming soon – the only smart play is to get serious about transforming this place into a vibrant, attractive economy like the one across the Sabine.

And that means dumping the income tax.

The voters understand this. All these income tax bills wouldn’t be getting votes if the populace didn’t want the income tax done away with. It’s the same thing as the Stelly plan the ink-stained wretches rend their shirts about losing. You’ve read all the columns screeching about the irresponsibility of the legislature doing away with Stelly and what that’s done to the state’s budget. In very few of those columns have you seen any indication that the reason Stelly has been gutted is because that’s what the voters wanted. Stelly was horrendously unpopular, because it soaked the productive class in the state and drove them to places like Texas and Florida.

Now, the voters want to finish off the income tax altogether. Marionneaux, who might be the last of the populist/Bourbon/Edwardsite Democrats left standing (and he’s term-limited after this session, so he’ll depart the stage unless he decides to launch a run for some other office this fall), is smart enough to get that – disingenuous though he may be about his plan. You wouldn’t be trying to enact a poison-pill agenda like oil processing taxes and wiping out business incentives unless you’re wrapping something tasty around it, and he chose the income tax repeal.

If Marionneaux can figure this out, folks like Hanna and Erwin certainly should.

I would put forth the notion that an income tax repeal needs to become the end, not the means. It’s time to stop thinking it’s responsible to say “if we’re going to cut the income tax out of the mix then first we’re going to have to figure out how to cover that loss of revenue.” That’s entirely the wrong formulation, and while it might seem responsible it’s anything but.

What’s responsible, what’s reality, is that Louisiana isn’t going to get a real opportunity to restore the growth in our economy and population – even if we have another energy boom – without making this state competitive with Texas and Florida. Since the voters and now the legislators have come around to the conclusion that killing the income tax has to be a major component in that competitiveness, an analysis which uses the income tax as a variable rather than a constant is a recipe for failure in creating that competitive economy.

The income tax repeal is the constant. The state spending it currently finances – badly at present, it turns out – is the new variable.

Oh, the story goes, but Texas has these massive property taxes compared to Louisiana. It’s a tradeoff. Copying Texas means we’d have to jack our property taxes up and we’d have to dump the homestead exemption. The voters wouldn’t like that any better than the current system.

The fact that there are a hell of a lot more Louisianans moving to Texas than vice versa gives the lie to that analysis.

The thing nobody is talking about, or at least nobody I see, is that property taxes are a far better source of state revenue than income taxes. For lots of reasons. Here are a few.

Property taxes offer a lot more stable source of revenue than income or sales taxes. People who make high incomes are very often owners of businesses large and small. When the economy is percolating nicely, those folks make great money and the state coffers fill to the brim. Naturally, that money gets shoveled out as fast as the politicians can collect it. And as soon as the economy drops off, the high earners dry up as a revenue source and government can’t fund all the obligations it took on in the fat years. If you’re basing your tax code on property taxes, you’re going to get revenues in much more predictable amounts. That allows for much better planning on the expense side than Louisiana has ever done.

Another feature of stability is that citizens know what their tax bill is going to be when property taxes are the primary levy they’ve got to pay. Particularly if you’re a business owner, you probably don’t know what your income will be. You definitely hope you’ll know what your expenses will be, though, and if your tax bill is more predictable you’re more likely to make decisions which expand the economy.

Property taxes are usually – if not always – assessed at the local, rather than state, level. And states in which property taxes rather than income taxes are the prevalent means of government revenue tend to flow money through local governments rather than state governments. This is important, because in most cases better and more efficient government is that which is closer to home. And without question local government is more responsive, or at least it’s relatively easy to make it that way if the folks get engaged enough. After all, local governments generally can’t levy property taxes without floating them onto the ballot. And that means the taxes can be voted down.

And that means that if you want to “pay” for losing the state income tax, the best way to do it is to start chopping away at state money which flows to local governments – so that if those governments want to replace the programs the state is running for them, they’ll need to float the funding in a tax election.

If you think that sounds dangerous, consider something of a funky example.

The state had been heavily subsidizing the athletic program at the University of New Orleans, which occasionally produced some quality teams in baseball and men’s basketball. But no matter how good the Privateers might have been in a given season, one thing was certain; attendance was going to be atrocious. Particularly student attendance. So a year or so ago, amid the first round of budget cuts in the current down-cycle, UNO’s administration put to the student body a proposal for student fees to cover the shortfall for the athletic budget. And in an election with a putrid turnout, the fees lost – and UNO is now moving out of Division 1 due to lack of funds. Now, is that sad? Sure. But ask yourself this: if the alumni and students at UNO who didn’t show up to the games and won’t vote for student fees to maintain their own athletic program at a Division 1 level didn’t care enough to sustain it, what’s the argument for keeping it going with state funds?

And the UNO example is anything but unique – the state picks up the cost for countless local programs that those most closely affected wouldn’t opt to cover out of their own pockets through local sales or property taxes. The Minimum Foundation Program, which spends some $3.5 billion per year paying unionized teachers who make well more than $10,000 per year above the state average income despite generating substandard results almost across the board, is a good example. Right now the teachers’ unions only need to go to the Legislature and make a stink about getting a bump or avoiding cuts in that pool of income, rather than being forced to make their case at the local level where parents and taxpayers are able to evaluate whether they’re getting their money’s worth. If public-school teachers’ salaries come exclusively – or at least more exclusively – from local taxpayers, do you think they’re more, or less, motivated to generate customer satisfaction from parents and their taxpaying friends? That’s an easy question, and it’s why the Louisiana Federation of Teachers and the Louisiana Association of Educators want everything done at the state level so they can focus on scaring only one set of politicians.

It’s also time to reconsider what we’re doing with homestead exemptions. Look, I’m not a particular fan of doing away with mine, but the effect of the exemptions is the opposite of what’s needed – namely, to broaden the tax base. If you live out in the sticks or in a crappy neighborhood and your place isn’t worth more than $75,000 – which comes to more real estate than you might imagine, particularly in the most cash-strapped of the state’s parishes – you don’t pay property tax. So you’re not paying for the public schools your kids go to, and as such you care less about what goes on there. And you’re a lot less interested in whether the police jury or parish council is busy robbing the citizens blind.

We don’t have to eliminate the exemption altogether, but changes should be made to it. For one thing, we would do well not to have the most generous exemptions around. And for another, it might be time to revisit state Rep. Kevin Pearson’s bill last year which would have made the exemption kick in after the first $10,000 of value. That measure would make everybody pay something in property tax – which again, can be written off on the federal tax return – and make the voters more interested in what the politicians are doing. And it would do wonders for the fiscal health of places like Tensas Parish. The effect? Maybe the state doesn’t necessarily have to spend $3.5 billion a year on the MFP, since that money can be collected and spent at the local level where it belongs.

But regardless of whether it would be a good idea to migrate toward a system based more on property taxes, you simply can’t continue to defend a regime that isn’t producing results for Louisiana. It’s not cheaper to do business here than neighboring states, and until it is we’re going to struggle to be competitive.

This is a case where the voters are ahead of the pundits. The majority of the electorate is looking for a diminution in the size and scope of the state’s government. It’s time to pass a clean repeal of the state income tax to make Louisiana competitive with Texas and Florida, and then use the urgency of that repeal to reorient state government toward the fiscal realities which result.



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