SADOW: Comprehensive Tax Reform Ought To Be On The Agenda In Next Year’s Session

Taking a cue from this space, the Baton Rouge Advocate ran an excellent piece amplifying the issue of the distortive effects of Louisiana’s tax exceptions for corporations. But it didn’t go so far as to point out the policy direction to take to ameliorate the problems, which this space now will address.

Echoing many of the concerns noted recently here, the article points out that several large breaks (although it missed the fact that in its gigging of the solar system tax credit that this goes away at the end of 2017) have grown dramatically in recent years – an important point because while from 2009 to 2013 the proportion of the total state-generated tax revenues that the total amount of all tax breaks represented varied only between 47.8 percent and 52.8 percent, this was only 0.4 percent higher in 2013 than in 2009. This means that clipping just a very few, high-volume programs (which was done to solar in 2013) could bring a significant reduction in revenues lost, so long as the revenues gained from their existence did not exceed the amount paid out.

And it’s unlikely that they do, for while almost no benefit/cost studies currently are performed on these, for one of the biggest it is legally required every other year – the motion picture investor tax credit, which only makes a dollar back in tax revenues for every seven forgone (the article claims one in four, although that may include local tax revenues as well but, if so, errs in not accounting for local film tax credits that some jurisdictions give out as a total cost in tax revenues). The article tries to build the case for the others anecdotally in noting that there didn’t seem to be changes in industry behavior due to the credits, although sometimes that explaining clumsily; while natural gas activity that could take advantage of the horizontal drilling credit obviously fluctuates closely with the price of the resource, that doesn’t mean at the margins more gas won’t be produced with the credit and in fact this probably is amplified because the credit only is in play during the most productive portion of a well’s life.

Also important to note, which the article did not, is that some of the largest offenders that target smaller groups with presumably wasteful returns to taxpayers are geared towards individuals and go beyond just income taxes. Only one of the exceptions mentioned in the article, the horizontal drilling credit, even makes the top dozen in dollar terms, where far more revenues are foregone through such things as the sales tax exemptions on unprepared foods and drugs or the federal income tax deductions for both individuals and corporations.

Thus, a policy consensus that seeks to lop off the unproductive exceptions also must include those outside the realm of corporations. Without perhaps realizing that, the article did so in its discussion of the solar credit, which is taken largely by individuals whether as homeowners of landlords, and the film credit, where corporations may initially garner the credits but most are sold to and get utilized by individuals. Among those used exclusively by individuals that unlikely are efficient the Earned Income Tax Credit stands out, an inferior instrument as compared to the negative income tax due to the ability of employers to pass it on in terms of reduced wages and the fraud involved with it. Alone without other welfare transfer payments its benefits may exceed its costs, but with a generous welfare system in America it becomes counterproductive at the national level, and worse with Louisiana adding on to the federal version.

So while there is a good case to pare a few of these, the article also does well to elaborate on the two major obstacles that could prevent this – lawmaker desire not to get tagged as raising taxes and while the costs are dispersed to the public the benefits are concentrated among a few, giving the latter tremendous incentive to lobby for exceptions’ retentions contrasted to the relative apathy of the former. That 2015 elections loom with reelections in mind (or, in the case of term-limited Gov. Bobby Jindal and some legislators, perhaps looking ahead to other electoral challenges) only intensifies these impediments to ditching any exceptions in the short run, with policy-makers reluctant to allow themselves to appear as willing to raise taxes on anybody.

Past next year, keeping in mind that the next constitutional opportunity to pare these during a legislative regular session is 2017, two strategies commend themselves to the task. The first involves an assault against the biggest offenders where the best case can get made for the wastefulness of these. However, the bigger they are, the more vigorously they will get defended, and each would demand a separate (two-thirds) majority to eliminate.

The other would moot the impact of income tax breaks by getting rid of the income tax itself and shifting the tax burden to other devices, a tax structure employed by a growing number of states. In 2013 Jindal tried this, but failed because he made the effort too complex for purposes of understandability that limited it persuasiveness in an attempt to show it would not raise taxes on any single person below the middle class, when in fact broadening the tax base by removing exemptions and adding additional items to be taxed such as services would have a noticeable positive impact, provided an overall revenue neutrality or negativity is observed.

The outlines of the plan actually would have achieved the goal of revenue neutrality, but politically the Jindal Administration failed to sell it. Worse, in going directly to surrender instead of using shelving of the plan as a tactical retreat, the governor missed a chance to build on the momentum he had established in making some marginal adjustments to the tax code that might heavily had leaned on getting rid of counterproductive exceptions.

That experience does not mean not pursuing next year something less grandiose along these lines, or at least a new governor and Legislature doing so in 2017. Even a reduction in income tax rates coupled with dispatching some breaks could move more towards efficiency. As opposed to the piecemeal approach, this strategy has the advantage of being able to offer to enough of the current beneficiaries the compensation of tax relief in other areas in order to overcome resistance to the extent that more comprehensive reform has a better chance of making it into law.

Wrapping everything together and handling it all at once in one giant mother of all battles instead of piecemeal conflicts probably has a greater chance of success. Gubernatorial and legislative candidates who promise this should get serious consideration from voters.

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