The Pelican Institute’s New Report Says If LA Wants To Grow Its Revenues, Kill Corporate Income Taxes

They’re not even saying to kill corporate income taxes and make up the budgetary difference by cutting government spending, which would be our prescription. The study by the Pelican Institute is suggesting Louisiana offset corporate income taxes by dropping tax exemptions and broadening the sales tax base.

The press release this morning…

A new report, Addressing Louisiana’s Budget Shortfall: Strategies for Growth, released today by the Pelican Institute, Louisiana’s premier voice for free markets, found that proposals to raise taxes to finance more state government spending will hinder economic activity and growth. The report is particularly timely, given Governor John Bel Edwards’ call for a special session, in which he has rightly taken tax increases off the table.

The report, produced in partnership with The Buckeye Institute’s Economic Research Center, determined that eliminating the corporate income tax and replacing it with a revenue neutral sales tax increase creates jobs, grows the economy and increases tax revenue.

“As Louisiana policymakers continue to explore remedies for revenue shortfalls, this report clearly shows that raising taxes to finance more government spending will hinder economic activity and growth,” said Abhay Patel, acting executive director for the Pelican Institute. “Unfortunately, Louisiana has routinely voted to raise taxes in order to balance the budget, while tax reform proposals have been rejected.  It is now clear, that to resolve its perennial budget crisis, we must adopt a more permanent tax and spending structure that fosters real and sustained economic growth.”

Orphe Pierre Divounguy, the lead economist with Buckeye’s Economic Research Center and the lead author on the report, said, “Rather than pursue revenues through increasing the tax burden on citizens, Louisiana would be better served by reducing or eliminating corporate taxes, and creating incentives for increasing investment, and job creation across the state.  Eliminating Louisiana’s corporate income and franchise taxes offer the best path for spurring economic growth and eliminating some sales tax exemptions would have the least harmful effect on the state’s gross domestic product while still raising additional tax revenue.”

Other key findings in the report are:

  • Eliminating the corporate income tax is the most pro-growth policy and would generate more than 11,000 jobs in the first two years, and boost the state gross domestic product by almost $1 billion dollars.
  • The commercial activity tax (CAT) would cause the most pain for least gain, reducing employment by more than 11,000 jobs, and would generate only around $260M in tax revenues.  When tested, the CAT caused the biggest drop in the state’s economy and withdrawing it from consideration was the right decision by the legislature.
  • While tax base broadening is good economic policy, it only works when it is offset by tax rate reductions, otherwise it is a tax increase which will reduce consumption and investment.

The report used a dynamic scoring model, developed by economists at Buckeye’s Economic Research Center, to test more than a dozen possible changes to Louisiana’s tax policy and show their effects on gross domestic product, jobs creation or loss, and revenue.

The report was authored by Orphe Pierre Divounguy, PhD, the senior economist at Buckeye’s Economic Research Center; Rea S. Hederman Jr., who oversees the work of the Economic Research Center and serves as Executive Vice President at the Buckeye Institute; Bryce Hill; and Lukas Spitzwieser.

Click here to download the report.

 

Of course, on the first page of the report Stephen Gele, the chairman of the Pelican Institute board of directors, makes the point about spending…

This report is critical in providing the legislature with sound research on the impact of changes to tax policy, but it is only half of the issue. To fully address the state’s economic problems, we must look at and address the level of government spending. Only by reforming both the revenue side, through the adoption of pro-growth tax policies, and by getting our government spending under control, will Louisiana begin to spur economic growth at the rate we need to succeed and grow.

The interesting thing about Louisiana’s corporate income tax is how often the pro-tax crowd complains about the fact there is more money “spent” on exemptions and credits than the tax actually takes in. There is an assumption, or perhaps the better descriptor for this is a “mentality,” that all of the exemptions and credits surrounding Louisiana’s corporate income tax were put in because Big Business hired lobbyists who took state legislators out for fancy dinners at Ruth’s Chris Steak House.

But that has very little relationship with the truth. The fact is, when Louisiana’s current tax code was put in place in the 1970’s with the current constitution, the state started bleeding jobs and capital to Texas, which has no corporate income tax. At one time downtown New Orleans was a major international hub for the oil and gas industry to house corporate headquarters; by the late 1980’s that was all but gone as one by one first the giants in that industry and then the independent oil and gas folks decamped elsewhere – mostly to Houston. Manufacturers, retailers, even the corporate headquarters for Ruth’s Chris Steak House, which is now in Orlando, followed suit. Louisiana’s capitalist infrastructure has been hauled away piece by piece over the last half-century to an extent you’d generally only see in a declining northern state like Michigan, Ohio or New York.

And the plethora of tax credits and exemptions was put in place bit by bit as an attempt to hang on to what was left. Louisiana’s political class didn’t have the stones to do a full reset of the tax code in order to make it competitive with Texas in the general sense, so instead everybody who was still here and had options to leave saw themselves addressed by small changes to the tax code to keep them around.

That’s why you have this patchwork of credits and exemptions. And the effect is that Louisiana’s overall tax burden is relatively low, but it’s still an unattractive place to do business because you have to hire lawyers and accountants who can find the credits and exemptions. In Texas you don’t need to do much of that because they have no corporate income tax at all.

And from the state’s perspective, the lament of the pro-taxers is that the state spends too much money on the credits and exemptions, but that’s an entirely wrongheaded view; the credits and exemptions are what keeps a lot of these companies from picking up and leaving – and if they were to close up shop and hit the road, not only wouldn’t Louisiana collect their corporate income taxes but the state and its local departments wouldn’t collect sales, property or income taxes from their employees currently living and working here. That was the whole point of passing the credits and exemptions in the first place which the Pelican folks agree should go away along with the corporate income tax.

So simplifying the tax code and killing a whole class of taxes to make Louisiana more like Texas is a smart idea. We can live with “paying for it” by cutting sales tax exemptions to an extent, but as Gele said the real answer is to go further to make this state more like Texas. The real answer is to do two things; first, to set Louisiana’s “unique” (an adjective we’re not using as a compliment) $75,000 homestead exemption free, meaning to let each parish ratchet that number up or down as it sees fit based on the nature of its tax base. Jefferson Parish might decide to raise the homestead exemption, as its politicians have advocated for, while Tensas Parish would probably opt to greatly reduce it.

And then second, once Louisiana has unfettered its local governments to a large extent so they’re able to fund themselves with property taxes, which are the most stable and predictable forms of tax revenue, Louisiana needs to make major cuts to the subsidies the state ladles onto them. That means eating away at the $3.7 billion per year in giveaways to local school boards through the Minimum Foundation Program. It means reducing or eliminating supplemental pay for cops and firefighters, which the locals ought to be paying for. It means downloading control of oodles and oodles of what are essentially local streets away from the Department of Transportation and Development to parish control. And lots of other things the state pays for and controls…badly.

Gele hints at that, and in a prior study Pelican, also using the Buckeye Institute’s research team, made mention of it.

Very few of these things can be done without a constitutional convention, of course. And while there was a bill to bring one, which failed last week, you won’t find many people who have interest in starting that process while John Bel Edwards is Louisiana’s governor. It’s a 2020 item, at the earliest.

But studies like this one by the Pelican Institute can set the stage, and it’s important to build a consensus around what actually works. We know what works, because they’re doing it in Texas and kicking our ass with it. Maybe some day we’ll commit to copying that.

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