SADOW: Landry Plan Roars In, Now Facing Strangulation

While Republican Gov. Jeff Landry’s fiscal reform agenda may have come in roaring like a lion, as the Louisiana Legislature’s special session to vet it comes around the backstretch it may not be going out with whimper, but more like emitting the sounds of strangulation.

Special interests – not a new story when it comes to the history of dealing with the state’s convoluted fiscal structure that instills higher income and sales tax rates than necessary then tries to offset these with far too many carveouts exempting discrete industries who win lobbying battles – have done their best to pervert Landry’s plan of broadening tax bases in exchange for extending sales taxes to activities commonly subject to it in other states and eliminating income tax breaks. Enough Republican legislators have responded to these blandishments to deny the narrow two-thirds majorities each chamber would need to pass changes that reduce tax breaks or increase rates, while almost all Democrats have opposed them from the start since the reforms increase overall sales tax collection at the expense of income tax collections, and as income tax receipts grow faster than sales tax receipts the change would put a natural brake on the growth of government that arouses Democrats.

Snapping at the heels of legislators caused deletion of many activities that would have become taxable at sale, even as that bill continues hung up in the House. The Senate also ratcheted back severely some income tax exceptions that also detracted from revenue. In essence, that caused three major changes to the plan to make up for this, one of these indifferent in impact but the others not so good.

Not a big deal, the state sales tax rate, instead of coming down marginally to 4.4 percent, would shoot up to 5 percent. That would add slight regressivity to the tax regime, little of that because unprepared food, utilities, and drugs would continue to be exempt from sales tax for individuals (and excluding one exception the plan was supposed to insert, on drugs applying to local government sales tax, but that was abandoned). However, for almost all individuals their income tax break would exceed any additional sales tax paid, making for an overall progressive effect.

But another alteration would leave the corporate rates unchanged except for a small decrease in the top rate from 7.5 to 6 percent, instead of installing a 3.5 percent flat rate, making for less of a cut. Then there’s reversal of changes a few years ago that sent vehicle taxes to capital outlay rather than the general fund, which mutates the tax from something paid as a consequence of using vehicles to ameliorate effects of that usage into just another way government can find to use its coercive power to squeeze money from someone. If this carries through, the least the Legislature could do would be to earmark it for operational expenses of public safety, as it partially used to be.

Yet even worse than these subversions are the maintenance of two income tax breaks, which Landry’s plan sought to eliminate, that are more than just that but can become, especially in one case, a printing press of taxpayer dollars spewed to well-heeled out-of-state special interests.

The rehabilitation of historic structures tax credit is against income and corporation franchise tax for the amount of eligible costs and expenses incurred during the rehabilitation of a historic structure located in a downtown development district, located in a cultural district, or contributing to the National Register of Historic Places. It’s 25 percent of cost unless in rural areas where it increases to 35 percent.

It’s not so bad, especially as Landry’s plan to get rid of the franchise tax remains intact and anything below the 25/35 percent ceiling only can be carried forward for five years, so the current cap of $125 million would not seem even reachable in any given year and much might expire, costing taxpayers little but encouraging repurposing old buildings of apparent historic interest. Except that the credit also is transferrable without limit, greatly increasing costs as those with tax liabilities snap them up and apply them, but at least a worthwhile asset comes back into service.

But the absolutely least productive, most wasteful is the Motion Picture Production tax credit because it is fully refundable. In practice, that means a handful of out-of-state entities, who employ nobody in Louisiana and pay next-to-nothing in state income taxes, reap in some cases tens of millions of dollars directly from taxpayers, because their excess credits they can sell back to the state for 85 cents on the buck. A few thousand subcontractor employees, some from Louisiana, will receive a small portion of this (in fact, about $13,300 for each job), but most of it flees out of state. Given the present $150 million credited limit per year (although $180 million can be cashed out in a year), it would be as if anybody employed by a production qualifying for the credit could go to the door of a family of four in the state and legally demand one cent (actually, closer to 1.2) from the household, then go next door and do the same, and so on.

It is legalized robbery that has a negative impact on state finances, as a slew of reports have verified, where even the most optimistic shows it returns only 40 cents on the dollar to the treasury, meaning if the credit didn’t exist along with all the artificially created jobs and economic activity it supposedly stimulates (a good portion of the activity probably would have occurred anyway with the marginal ones not, which is why so many subpar and/or forgettable films have been made in Louisiana for theaters and television over the past two decades), typically the state would be $90 million richer and that much less in need of finding offsets under Landry’s plan. Instead, the revised version weakly cuts the issuances to $125 million a year, while reducing the historic structures tax credit to $85 million.

So, at this point Landry’s grand soufflé is turning into weak sauce. Perhaps that’s to be expected given the inertia it was up against, but it nonetheless is disappointing, and hopefully it won’t face further dilution in the remaining week of deliberation.

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