They’re holding hearings here and there on tax reform at the Louisiana capitol, as Gov. Jeff Landry is trying to get a consensus together for a plan that would flatten personal and corporate income taxes, eliminate some onerous business taxes along with a bunch of carve-out tax breaks that shouldn’t be needed with a more competitive tax system, and then broaden the sales tax base in order to raise enough revenue to do this without shrinking the state’s revenues.
What it sounds like is that Landry and Revenue Secretary Richard Nelson are going to have two problems selling the plan.
First, the 0.45 cent sales tax hike left over from John Bel Edwards’ tenure as governor, which is scheduled to roll off the books next summer and which Nelson wants to make permanent as a means of facilitating the elimination of things like the corporate franchise tax, inventory taxes and the flattening of the state income taxes, is a tough sell. There are a lot of legislators who want that 0.45 cents to roll off as scheduled, as it was voted into being as a temporary tax hike, and for a lot of them a vote to keep it going is a vote for a tax increase.
The other problem is that broadening the state sales tax to cover things like dog grooming, legal services and other things which are “luxury” items is seen by those same people as a tax increase. Not to mention that the businesses performing such services aren’t set up to collect sales taxes in many cases, so that’s a new paperwork requirement for businesses they won’t like.
Nelson’s comeback to these objections is that Louisiana will need to start tax reform with a revenue-neutral approach so that once the state’s tax structure can be made more sound, then rates could be ratcheted down to the point where Louisiana then becomes competitive with other states.
He isn’t wrong, per se, in that the approach here is to make taxes as broad, simple, and flat as possible. On the other hand, Nelson noted that the plan would, due to adjustments to the standard deduction and other items they’re offering, the richest 1 percent of Louisiana income taxpayers would go from carrying 55 percent of the state income tax burden to 61 percent.
And that might sound good, but if you drive around the state what you’ll notice is that Louisiana doesn’t have enough people with money.
This isn’t an invitation to trust-fund babies from Boston and San Francisco to set up shop here, necessarily; there is some of that in places like Faubourg Marigny and the Bywater in New Orleans, and that city isn’t particularly better off having those transplants trying to turn the Crescent City into hipster heaven. That said, there are lots of highly productive folks living in blue states who are still looking to make their way to the South, and it would be a shame if Louisiana missed out on attracting those people – and less importantly, if the state missed out on the tax revenues the economic activity they’d bring would generate.
Do you get that bumping the share of the tax burden for people like them from 55 percent to 61 percent? I don’t know.
What I would say as the contours of this plan are being shaped in advance of a legislative session which is being planned for November 4-18, or at least that’s what the common understanding of it will be, it would be a good idea to adopt the tactical framework that Edwards used to leverage the passage of that massive sales tax hike in the first place.
Because, as dishonest as it was, we know it works.
Let’s remember what happened back in 2015 and 2016, shall we?
Edwards got elected in what was one of Louisiana’s more notable upsets not because of his tax policy but because of David Vitter’s “hooker problems.” Nobody really paid attention to Edwards’ voting record in the Louisiana legislature or anything he said about taxes and budgets, and it didn’t really matter if they had because all he did was lie anyway.
He’d been one of the most left-wing Democrats in the legislature for two terms, voting for as much tax-and-spend boondoggle policy as he could. Not much of that passed because Bobby Jindal, the governor at the time, was a fairly respectable fiscal conservative (at least, on balance we’d have to give Jindal credit for that). But Edwards had voted for six of Jindal’s eight budgets. Running for governor, though, Edwards pivoted to national Democrat rhetoric and started touting a “fiscal cliff” that was $2 billion deep.
He said he could solve that problem without raising taxes.
But as soon as he got elected Edwards then began screeching about the “fiscal cliff” and the impending implosion of state government if he couldn’t get massive tax increases passed. He even threatened the end of college football in Louisiana, as stupid as that was.
And it worked. He got a full cent of sales tax passed, plus a host of onerous business taxes. And over his eight years he basically doubled the state budget, for a state with a population which was stagnant or shrinking, and which had net outmigration in each year he was in office.
Edwards will go down as a massive failure as Louisiana’s governor. You’d have to go back to Edwin Edwards’ last term in office to see anything that would match the stagnation this state suffered during Edwards’ tenure. But from the standpoint of getting his way and sticking it to his political enemies, there is something to be learned by his example.
What does that look like?
Here’s an idea – go to that legislative session next month and pass all the tax cuts everybody likes. Flatten the income taxes, kill the business taxes we all know run economic activity off to Texas and Florida and elsewhere.
Create a deficit. Deepen the “fiscal cliff.”
And then go into next year’s regular legislative session screeching about the utter disaster facing Louisiana’s government because there’s no money coming in.
That’s leverage. Just like Edwards had.
The difference is in what you use the leverage for. In this case, Landry can use it to scrub the state’s $50 billion budget.
One idea I heard which would save the state some $400 million per year is to require that Medicaid recipients recertify their eligibility every three months. Currently we only require recertification every year, which is not what other states do, and as a result we have a gigantic number of people on Medicaid who aren’t really eligible.
That’s a no-brainer of a reform. Requiring co-pays for Medicaid recipients, particularly with respect to emergency room visits, is another. That would save the state well over $100 million.
Nelson is pushing the idea of dumping $2 billion from the state’s Revenue Stabilization Fund into paying off local school district debt, which would save those districts $300 million a year in debt service, and then mandating that those savings go toward paying teachers. That’s a really good idea, in that it offloads a significant expense from the state to local government – without being an unfunded mandate. The guess here is that with a little work Landry’s administration and the legislature can find a good many similar plans which could shrink the state’s bottom line.
Then there is the idea of lopping off five percent of all agency budgets across the board, which would save some $800 million a year. They’ll absolutely howl about that, but nobody thinks that state government is a particularly tight ship where a five percent trim can’t be painlessly done.
But – and this is important – Landry needs to be prepared for what’s going to happen when the bureaucracies are asked to make responsible cuts. We saw an example of this over the summer when the Louisiana Department of Health was asked to find areas they could cut, and they coughed up $105 million in savings, which they warned would put in jeopardy some $332 million in federal matching funds.
And what was this for? Essentially, health care for poor kids.
You’ve heard of the Washington Monument Strategy, right? It’s called that because the old joke in DC goes that if you’re trying to cut federal spending, the first thing the bureaucrats will want to do is to shut down the Washington Monument. What this means is that rather than making a good-faith effort at trimming the fat they’ll try to make any suggested cuts hurt the public as much as possible.
That’s extortion. If it wasn’t government employees doing it, you’d be able to arrest and jail them for that.
How do you handle this if you’re Landry? Simple, and brutal. You roll with it.
If the bureaucrats at LDH send up $105 million in cuts to health care for poor kids, you bank that $105 million and you hang it around their necks.
“It was the public-health experts at our Department of Health who said we didn’t need this spending,” Landry could say. “And I’m told I should listen to the experts.”
Watch how fast these people scurry for shelter when the public outrage builds. You’ll get some real suggestions for eliminating waste then.
The way to beat the Washington Monument Strategy is to call its perpetrators out. When they realize not only that you are onto them but you’re a lot more ruthless than they are and you’re willing to weaponize their use of the Washington Monument Strategy against them by then suggesting we need civil service reform so you can fire the heartless bastards who would rather cut health care for poor kids than wasteful consulting contracts for the usual crony suspects, this stuff begins getting a lot easier.
The money is there for Louisiana to dump its state income tax and those terrible business taxes. We’ve been wasting it for decades. Going back to a 2019 pre-COVID budget baseline and restrict state spending growth to track with inflation and population increase would put the state in position to live within its means if all our tax reform dreams were to come true.
He just has to commit to the project. And Edwards showed how to do it when he made the opposite happen.