The devil is always in the details.
The state government deficit is big and the Legislature is in a special session called by the governor to review his plan for solving the problem. His plan is largely dependent on new taxes and the argument being made by his administration (with a few exceptions) is that spending cuts and large-scale structural budget reforms are either not feasible or require too much time to implement.
As a result, the first week of the session has been used to consider more than 60 different tax increase bills in the Ways and Means Committee. The Appropriations Committee has also regularly met to hear agency testimony, as well as a handful of bills that closely scrutinize state contracts and budget dedications. (See LABI’s bill summaries linked here.)
While the general term of “tax increases” is used often and pointed to by some as the sole and necessary evil to solve the state budget challenge, the specific policies behind that term matter.
Take the inventory tax, for example.
Twenty-five years ago, the Louisiana Legislature passed legislation to implement a state tax credit for the local inventory tax paid by businesses, which was a major step to make the state more competitive for business investment and jobs. Everyone understood the negative impact of the inventory tax on the state’s economic competitiveness and wanted the impediment removed. The new credit had an immediate positive effect on the economy and was credited with bringing new jobs and warehousing facilities into the state. Over the years, it has also helped to grow numerous other industries and jobs in the state.
Here is how the inventory tax and credit process currently works:
- Local tax assessors determine the amount of inventory businesses have.
- More than 10,000 businesses—from large, multi-national corporations to small manufacturers, from auto dealers to neighborhood grocery stores—pay inventory taxes to their local governments.
- This generates about 11 percent of all local property taxes collected in Louisiana.
- Several months later, the businesses are eligible to claim a refund for the inventory taxes paid to local government on their state income taxes.
These businesses in essence are giving a no-interest loan throughout the year to the state of Louisiana. They haven’t complained about it, even though they have been forced to be the middleman for this annual state government subsidy to local government.
Instead of thanking them for playing this role, the Legislature and some in the media have used the cost of this credit to portray business as getting a big windfall from inventory tax credits. This blatantly disingenuous argument has been perpetuated for the last two years to justify a broader agenda. In no circumstances does the state’s tax credit exceed the amount of taxes paid to local government.
The vast majority of states do not collect inventory taxes. In fact, the Tax Foundation estimates only 13 states levy an inventory tax and that states are reducing or eliminating taxes on tangible personal property as a trend due to their many disadvantages.
Included in the governor’s 23 tax proposals to address the current government deficit is legislation to repeal the inventory tax credit for this year and reduce it considerably every year going forward—effectively raising taxes. This legislation, along with several others, will come up for a vote soon in the House of Representatives.
Considering our economy is in a recession, this inventory tax increase will have a significant negative consequence for any business that is holding inventory—at a time when they can least afford it.
Think about it. In a recession, sales slow down. Inventory sits on shelves, on docks, in a lumberyard, on a showroom floor and in warehouses longer than usual because consumers and business partners are being more cautious in their spending. Under this proposal, the longer it sits the higher the tax.
This is especially true for the oil patch which has been hit the hardest. Louisiana has lost over 10,000 oil and gas jobs in the last year and unfortunately the threat of more losses are upon us. As this market slows down, inventory of all shapes and sizes will sit idle when businesses simply cannot move it to customers. This is the worst possible time to now tax those products even more.
Repealing the credit will incentivize companies to move any inventory they can to states that do not have an inventory tax. Those that can will definitely do so because they know they can always ship that inventory into Louisiana later when it is required.
Those that cannot move their inventory—like many of our small to mid-size retailers and manufacturers—will be forced to decide between new taxes, layoffs, passing on increased costs to an already cautious customer or slashing their currently slim margins to survive this economic slump.
Government has its challenges and everyone is working to address them in a responsible way. However, the causes for this deficit are much more than revenue. A weak economy, relatively high government spending compared to other southern states and a flawed budget process that has been protected for decades are the primary causes for our deficits, not just ancillary talking points to be mentioned from time to time.
Beware of the arguments being used to justify a solution that is solely dependent on new taxes and demand the details of these plans. Taxes like the ones proposed on inventory—and also utilities—simply drive jobs and investment out of Louisiana, a scenario that is bad for our economy, residents and government tax collections. We simply cannot afford to further damage our private sector in the midst of a recession.
The details matter in tax policy. A competitive tax policy is critical to economic growth. Economic growth is the best way to fund an efficient and effective government.
A comprehensive approach, rather than a tax only approach, is the only way out.