The biggest obstacle in Louisiana eliminating the individual income tax isn’t so much the mechanism as the punitive and redistributive attitude from the state’s populist political culture that lays behind the current perverse system that will have to be overcome to trigger the necessary dramatic changes.
Last week, the House of Representatives launched hearings into the matter, as an approach to shed the problematic aspects of the current tax regime. The best, most effective taxation system has fairness, adequacy, simplicity, transparency, and administrative ease, criteria on which Louisiana’s largely falls well short mostly due to its progressive nature amplified by numerous exceptions and special treatments.
Specific to individual income taxation, it’s not very fair because relatively few people pay the vast bulk of these taxes. Hit six figures in adjusted gross income and that 15 percent of filers pays 63 percent of the total, but the 59 percent who stay under $40,000 pays a measly 10 percent. Nor does the current regime appear to be too adequate since many years this century the state seems to have a funding crisis – although this also depends upon spending priorities which in some instances seem quite questionable.
Neither is it any of simple, transparent, and easy to understand and apply, riddled with exemptions, deductions, credits, or rebates, 95 in all. Worse, these add up to sucking out a third of the potential revenue with much going to retirees, lower-income filers, and federal taxpayers. These impair effectiveness by diverting resources to less productive sectors, if not working at cross-purposes.
Broadening the base by lowering rates and reducing exceptions does the best job in building an effective system, by preventing avoidance by utilizing less productive uses and keeping more in the hands of the most productive citizens while simplifying and clarifying and reducing administrative costs. A flat tax with few exceptions is optimal, and a flat rate of zero is the best of all.
Naturally, special interests invested in the current system that discourages wealth creation and encourage reduced productivity among the citizenry, as these interfere with their goals of larger government to redistribute more wealth, try to deny these essentials. Thus, at the leftist news site Louisiana Illuminator pops up a piece trying to denigrate the concept of removing individual income taxes.
It tries to impugn remakes made by Republican state Rep. Richard Nelson, who has spearheaded this effort, who noted several states with no income tax, especially southern neighbors, outgrew Louisiana by leaps and bounds. It noted that fast growers, both economically and in population, also included states with income taxes, and relied on the leftist Center for Budget and Policy Priorities to declare some select instances where states with no income tax had less migration into them than other nearby states or more of their people moved to those others than vice versa.
This cherry-picking of individual cases is designed to distract from the larger picture painted by the data: states with no income tax or, more generally, states with lower and/or flatter income tax systems have done better economically and thus attracted more residents, while among the states performing the worst these disproportionally comprise the higher/more progressive income tax states. Indeed, Louisiana shares more in common in tax system with the poorer performers than it does with the higher performers. And even the piece admits that research from the Tax Foundation, which is calls “conservative” when it’s more nonpartisan in nature, shows a strong correlation between lower taxes and higher population growth.
So, it trots out the reliably obtuse head of the CBPP’s Louisiana branch, Jan Moller of the leftist Louisiana Budget Project – which the article disingenuously terms “nonpartisan” – to try to salvage things. Let’s say he doesn’t improve matters.
Off the bat, Moller (a journalist by trade) shows either he never took a class on research methods or, if he did, he didn’t exactly light it up. He noted that correlation isn’t the same as causation – in the absence of theory or practice explaining the relationship, he failed to note. That’s not the case with lower taxes making for greater growth. There is tremendous face validity that lower taxes attract more people and expand economies, because it keeps more money in the hands of the most productive people, and the data provide empirical validity to that. Next thing we know, Moller will tell us the fact that greater incidence of seatbelt and motorcycle helmet wearing is associated with reduced road deaths and injuries doesn’t mean anything – another example of how behavior affects outcomes.
Next, Moller commits what is referred to as an error of monism, or the ascribing of a single factor to explain behavior of complex phenomena; in this circumstance by omission. He claimed that people moved “very rarely for tax purposes,” which ignorantly discounts that this can be one of several significant factors motivating behavior. Personally, I know of two people, one who wanted to leave from and one who refuses to move to Louisiana, specifically for one reason of several being its income tax regime. Readers probably have similar stories.
Then, apparently referring to the latest forecast, he sneered that “You’d have to find a way to replace $4.3 billion in revenue. If Richard Nelson wants to tell me how to do that, I’d love to listen.” Then listen up; I’ll tell you instead, keeping in mind the goal of broadening the base that will subsume redistribution of wealth to a superior goal of wealth creation that ultimately benefits more those willing to work productively than the tax kickbacks or breaks they currently receive.
Keep in mind that it can’t make the mistake of GOP former Gov. Bobby Jindal’s attempt in 2013 that tried too hard not to raise taxes on anybody which fell of its own complexity that made it politically unexplainable and therefore unsaleable. In order to improve everybody’s potential economic status, some taxes will have to go up and disproportionately among those who don’t or hardly pay not, but that will be more than offset by the economic opportunities that they can claim.
To start, it assumes all state spending is necessary; it most certainly is not, beginning with Medicaid expansion that largely covers people who already were paying for their own health insurance or had access to it otherwise. Lop that off and already you’re down to a $4 billion hole and should serve as a starting point for more cuts. (This erroneously assumes a static model that doesn’t count the extra revenues from the ensuing economic growth, as well as is inflated from the Washington Democrats’ debt spree, but we’ll set these considerations aside.)
Follow with jettisoning some unnecessary rebates. Getting rid of individual income taxation automatically cancels the productivity-sapping earned income tax credit (maintenance of this wealth redistribution measure is a main reason the Mollers of the world go apoplectic over the end of the income tax) and motion picture investment tax credit. Eliminate the quality jobs credit and get rid of the subchapter S credit (why use it without individual income taxes). These get you to about $3 billion.
Now take out big-ticket exemptions to other kinds of taxes that serve to flatten overall payment by households (remember, all individual income tax exceptions go away with the tax’s disappearance) – purchases with government benefits and sales of unprepared food, of residential electric power, and of prescribed drugs (most of these requiring constitutional amendments). That gets you well below $2 billion, as well as desirably flattens and broadens the sales tax regime.
Finally, change the fiscal relationship between local and state government by cutting back on transfers to local governments while giving parishes greater revenue-generating potential by dropping the homestead exemption (again, a broadening that also could lead to flattening), but also eliminating the inventory tax credit. Balance this out (again, requiring a constitutional amendment) to wipe out the rest of the hole.
It makes for a fairer system with greater incentives for people at all income levels to contribute to economic expansion. It takes a lot because there’s a lot wrong and half-measures, such as putting every filer into a flat two percent individual income bracket, may be needed as a bridge – especially as in a couple of years the sales tax hike that began in 2016 rolls off. But it’s still worth doing despite the yawping of those who would preserve the current system that serves ideological and special interests, not the people’s interests.