One of the most controversial issues of the recently completed legislative session was dealing with the numerous bills designed to phase out the state income tax. Some bills included both individual and corporate taxes; others would have been only for individuals. Some had a short phase-out period; still others had longer ones. Some of the bills would have raised billions of dollars in new taxes to replace the loss of revenue income taxes bring in. Some of the proposals required enactment of a plan to replace the lost revenues before the phase-out could begin. At the end of the day, none of the bills passed.
From a business perspective, eliminating or phasing out the state income tax could be a positive element for economic development, depending on how the proposals are structured. What many business owners would fear would be that individuals would be treated fairly in any income tax repeal proposal, but businesses would end up being taxed more to pay for it. Some evidence of that took shape when the Senate bill to phase out the income tax was amended in the House committee to restore the corporate income tax while eliminating the personal income tax. There were also unsuccessful attempts in the Senate to pass billions of dollars of new taxes on businesses to pay for the elimination of the income tax.
Legislators found it difficult in the span of a few weeks to attempt a massive change to the state’s tax code. On the surface, it appears easy to isolate one aspect of the code and tinker with it, but effective tax reform is more complicated and out of necessity should be multi-dimensional.
The states with no income tax generally have very high sales taxes and higher-than-average property taxes. Those states also tend to subsidize local governments much less than we do in Louisiana. None of them have state supplemental pay for fire and police and few of them have the parish road funds and other subsidies for local governments that we provide.
In Louisiana, we have used the bounty of mineral revenues to help pay for local government services. A cursory examination of the state budget and capital outlay bills shows just how much that occurs. Unfortunately, whatever goes up must come down. When the price of oil and gas spikes and then declines, state government experiences severe budget problems, even with income taxes in the mix. The state then must grapple with how to fund local services along with basic state operations.
The root of this problem goes back to the property tax. Louisiana adopted a homestead exemption back during the days of Huey Long and expanded it later. The industrial property tax exemption was adopted about the same time since it would have been extremely difficult to entice manufacturers to come to Louisiana if they had to pay the vast majority of the property taxes in the areas in which they located.
The major change needed to accompany any reform of the tax code is a restoration of balance between taxes collected and services rendered at the state and local levels. It is difficult for the state to cover the cost of providing true state services—post-secondary education, highways, indigent health care—and continue to pick up local government expenses. Property tax reform is a key to correcting that imbalance.
Phasing out the state income tax can happen. It would probably require a significant further reduction in state expenditures, property tax reform, reducing the amount of state aid to local governments (via property tax reform) and setting aside some of the annually recurring state revenue growth to offset the phase-out of the taxes. If that course is pursued, it should be planned for wisely and executed fairly.