The Fiscal Hawks put forth a deficit reduction plan after adjournment yesterday to address a $525 million structural deficit with $106 million in cuts, $87 million in other reductions and enhancements, and $329 million in revenues from trimming 15% off a variety of credits and tax exemptions, mostly corporate, such as the motion picture credit, net operating loss deduction, 50% reduction of exemptions for nonresidential utilities, and drilling. There was no economic sector left behind and the 15% haircut was spread throughout different sectors of the economy.
The million dollar question, of course, is whether or not reducing credits and exemptions is considered a tax increase. The businesses, of course, are claiming that it is, and will hurt the economy.
So what’s worse: continuing to rely on unreliable one-time money and ultimately cut higher ed and health care or reducing business tax exemptions.
Reducing Business Tax Credits and Exemptions
Let’s look at business credits and exemptions. Although not a direct expenditure by the state in most cases, there still is a cost to the state, called a tax expenditure, to account for the tax loss. If the state is going to give an industry a break from income tax and sales tax (which by the way we all pay), there should be a good reason for it, e.g. encouraging the industry to expand and promote economic activity. I have always felt that industry targeted tax exemptions, done properly, could help offset a disproportionate ad valorem burden and keep businesses competitive. But, is there a point when the state is being too generous?
Consider the corporate income tax. Without any exemptions, the tax would raise $2 billion. After exemptions, the corporate income tax only raises $238 million, a lost of nearly 90% or $1.8 billion. That does seem a bit generous. Also, what do you do about tax exemptions that wildly exceed their original cost.
Take the movie tax credit, which was estimated to cost $45 million annually, that has now ballooned to $230 million a year. Also the bulk of the credits don’t offset the taxes for a particular company, since none of the big studios are located in Louisiana, but are sold at a discount to investors who do have a tax burden, and sold on an exchange. Anytime tax credits are sold on an exchange, it could be argued that the program is too generous.
But supporters argue that time and investment is required to help establish the industry infrastructure and help create Hollywood South. But how much time and how much money?
Unfortunately, no one really knows for sure and there’s no real date on the effectiveness of any of that 90% of lost corporate income tax that dribbles through the state. Even though I’m conservative fiscally and pro-business, I would have no problem modifying or even eliminating tax exemptions for which the costs exceed the benefits. Even President Reagan, who is not exactly known as a tax and spend liberal, knew when to modify tax laws that created too many loopholes. While Reagan’s 1980 Economic Recovery Tax Act has been hailed the savior of reducing high marginal income tax rates, the Gipper wasn’t afraid to close some of the loopholes just two years later with the Tax Equity and Fiscal Responsibility Act of 1982.
The trick in Louisiana is of course figuring out the loopholes. A Revenue Study Committee was formed last year to chase down the loopholes, but members claimed that they lacked necessary information. I think a legislative priority would be to obtain information with a comprehensive study of all tax exemptions.
Without this information, the proposal is to simply cut everyone 15% so that no industry is too adversely affected.
So is 15% for four years really that big a deal. It apparently is to businesses who view it as a tax increase and possibly just the beginning. Once you get in the habit of suspending tax exemptions, even 15% worth, there is concern that the habit may linger. In 1987, the legislature “temporarily” suspended certain sales tax exemptions to get through the tough budget times, which was renewed for 20 years.
Also could this across the board send a negative signal to businesses as national perceptions of Louisiana continue to improve.
Using One-Time Money to Balance the Budget
I don’t have a big problem with using one-time money occasionally to avoid tax increases or devastating cuts and to get through a rough patch. But this practice has been done for several consecutive years and results in mid year budget cuts because it is not completely reliable.
The issue with these continuing cuts is that they disproportionately affect higher ed and health care. With most of the budget constitutionally protected, a whopping 76% of the discretionary budget is in higher ed and healthcare.
In addition, the current budget also uses some nifty accounting, such as the use of $100 million from the New Orleans Convention Center fund balance to be replaced with the state issued debt amortized over 20 years. Can higher ed be really comfortable relying on this money?
There’s no question that budget cuts over the past few years have been painful and far reaching. When budget cuts hit Mandeville, which I represent and which has minimal reliance on state services, you know it’s pretty bad. But just last year Southeast Hospital, which provides mental health services to the area, was privatized. Although we are hopeful about its long term prospects, it was still very painful with several hundred state employees laid off.
In support of their plan, the Hawks circulated a five-year history of budget cuts, which are pretty dramatic, particularly with higher ed that has been cut 80% by the state. However, the one issue with the five-year comparison is that the state was still flush with Katrina money in 07/08, which marked a high point in state spending. The 10-year history, which is more reliable, reflects an 18% cut, which has primarily been offset by higher tuition. Still, Louisiana state government was fat 5 years ago, today it is a bit chunky, but with the extra pounds in all the hard to reach places. For example, everyone agrees Louisiana has too many 4-year colleges (14), but no one agrees on what to do about it. So it’s hard to justify across the board revenue increases when structural reform is needed.
This isn’t an easy decision for a legislator trying to cut through the rhetoric to do the “right” thing. For the universities the “right” thing is raise revenue from businesses and for businesses the “wrong” thing is to tax them.
So it boils down to which is worse, budget uncertainty with one-time money or economic uncertainty with tax increases.