This has made it out into the world. It’s an e-mail from Louisiana’s Legislative Fiscal Auditor, Greg Albrecht, to Rep. John Schroder on the question of whether tax exemptions constitute government spending and whether a suspension or diminution of those exemptions would constitute a tax increase.
This is likely going to be circulated by the fiscal hawks as a rebuttal to the Jindal administration and the state GOP for their attacks on the House’s forthcoming plan to scale down tax exemptions to resolve Louisiana’s $500 million budget hole. We’ll get into that in a minute, but first, the letter…
Tax credits should be thought of as government spending, and reductions in credits are reductions in spending, not increases in taxes.
On any individual or business tax return, you calculate your tax liability by multiplying tax table income by the tax rates in law. That is your tax liability. Only changes in tax rates or tax table income are tax changes. Once your tax liability is determined, you reconcile that against any prepayments of taxes you may have made (withholdings, declarations) to determine is you owe more or if the state owes you back a refund of overpayment of tax. This is all having to do with tax. Tax credits do not come into play.
Only after you determine your tax underpayment (you owe the state more) or your tax overpayment (the state owes you a refund) do you then go to an entirely separate section of the forms to see if you qualify for any credits. Your eligibility and amount of credit is determined wholly outside the tax return, based on conditions that have nothing to do with your tax liability. Did you spend money on a certain activity (producing movies in Louisiana or paying local property tax on inventory or remodeling an old building etc.). Based on the provisions of these various programs you are eligible for a specific dollar amount of reimbursement of your spending. It may be 100%, or 40%, or 30%, or 25%, or up to $250 etc – these are all actual rates of reimbursement in various credit programs.
Once your dollar benefit/reimbursement/support is determined, you bring that back to your tax return for payment.
Refundable credits are paid in full regardless of whether you have any tax liability at all. The credit program gives you $1,000, or $50,000, or more and your tax liability is $0, we still give you the entire $1,000 or $50,000 or more. This is entirely spending. No tax involved at all. We only use the tax fling as a mechanism to send you the money b/c the Revenue Dept handles the receipts of the state first and can send you the money before it ever gets into the state’s coffers.
Nonrefundable credits are paid up to the extent of your annual tax liability. The credit program gives you $1,000, or $50,000, or more and your tax liability is $500 or $25,000 or less than the credit amount, we give you the benefit up to your liability. We are still on the hook for the entire credit program benefit amount (the remaining $500 or $25,000 in these examples) and we allow various carry-forward periods (3-years, 5-years, 7-years, 10-years) for these unused amounts to be used to make sure you get all the benefit coming to you. We just don’t want to pay it out all in one year, but we are willing to pay it out entirely over time. This is also entirely spending. No tax involved at all except to limit our annual exposure, but not our total exposure. Again, we only use the tax fling as a mechanism to send you the money b/c the Revenue Dept handles the receipts of the state first and can send you the money before it ever gets into the state’s coffers.
Rebate payments are obviously spending. As with credits, the payment benefit is calculated without regard to the recipient’s tax situation, and in the case of rebates is paid without even a tax filing. The awarding agency (typically LED) administers the programs that generate rebates, gives the participating business it’s rebate paper which is then directly redeemed at the Revenue Dept for a cash payment. This is entirely spending. No tax involved at all, not even a tax form filing. We use Revenue Dept as the payor b/c the Revenue Dept handles the receipts of the state first and can pay the money before it ever gets into the state’s coffers.
Also realize that we are miss-using the word rebate (meaning to give back something you paid). No recipient of a rebate has to have ever had a state tax liability or have ever paid a tax to the state. We are not giving back the tax payments they gave us. We are giving them the tax payments that some other taxpayer gave us. Again, this is spending just like any other government program (education, health care, corrections etc).
All of these credit and rebate programs constitute open-ended, unappropriated spending. We realize the costs of these spending programs as less net tax collections deposited into the treasury simply b/c we assign the Revenue Dept the job of disbursing these funds from the current collections of tax receipts that it handles every day.
Finally, these spending programs receive special status in the state’s budget. They are claims on the resources of the public (state budget) but do not go through the annual appropriations process where other spending programs are weighed against each other and allocations of the limited resources we have are made by vote of the legislature. Credit/rebate spending programs are limiting the resources available for all other programs but are not having to compete head-to-head with those other programs on their merits.
We’ll refrain from playing English teacher on some of what’s in there and say that we don’t agree that all tax exemptions constitute government spending, with one caveat – if what Albrecht is saying is that by using the mechanism of exemptions and rebates to lower a tax rate on a class of economic activity you’re using government spending to lower that rate, he has a point as a logistical matter if not as a matter of philosophy or policy.
As a matter of policy, though, Albrecht’s letter is less helpful. He seems to be coming from a mentality which is decidedly “public-sector,” as in, it’s all the government’s money and giving any back to the people who earned it constitutes government spending.
That won’t cut it. And it means that if the fiscal hawks want to use Albrecht as authority for the prospect that they’re not raising taxes by getting rid of or cutting exemptions, they’re making a real mistake in defending against Jindal’s charges they’re RINO’s.
The answer on cutting exemptions is to find the ones which don’t make economic sense and focus on those. Get rid of the tax exemptions which only incentivize economic activity that (1) wouldn’t exist without favorable tax treatment and (2) don’t provide a tangible statewide economic benefit.
In other words, focusing only on the tax exemptions which serve a political, rather than economic, purpose.
There are lots of tax exemptions which are in place as a tacit acknowledgement that Louisiana’s tax code is basically uncompetitive with states like Texas and Florida which don’t have income taxes, and the industries those exemptions benefit would be pulling out of the state and going elsewhere otherwise.
Gov. Jindal was correct in his attempt to remedy this issue by putting forth an income tax repeal plan, even if that plan didn’t actually go anywhere. And that plan included the reduction and/or elimination of some exemptions.
There should be common ground here on those exemptions Jindal wanted to get rid of – and if a few gravy trains are knocked off the tracks as a result of some legitimate budget reform the governor and legislators of his party can agree on, that’s OK.
And if the state can be put on a stronger footing revenue-wise as a result of those common-ground reforms, it’s good governance. Furthermore, if that stronger footing can be coupled with some tax reform as well which lowers rates on business and individuals as a setoff to uneconomic exemptions which are actually subsidies in drag, it’s better governance.
We should be working on a plan along those lines rather than wasting time with a political argument over whether tax exemptions are government spending and cuts to those exemptions amount to tax increases. Jindal isn’t doing anybody any favors by bringing that argument up, and the fiscal hawks aren’t helping anyone’s cause but the Democrats by using Albrecht in an attempt to debunk Jindal’s position.