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Begin Business Tax Cuts, PAR Urges

Instead of spending $16 million next year on slush fund projects, the state could begin phasing out the sales tax on manufacturing machinery and equipment (MM&E) and the corporate franchise tax on borrowed capital. PAR recommended removing these two impediments to economic development based on its 1994 and 2002 studies of corporate tax burden comparisons in the southern states.

The new administration favors eliminating these business taxes but wants to delay until fiscal year 2005-06 so it can plan for the resulting loss in revenue. At the same time, the urban and rural slush funds would be budgeted at $16 million, if the temporary sales taxes on business utilities were renewed. The administration proposes to use the slush funds more effectively to leverage other public and private funding.

The slush funds would be used for a variety of small projects scattered across the state. The governor’s ability to allocate these funds to various legislative districts is of no small political value. The question is whether the economic development value of these projects would rival the value of the state being able to announce the phase out of taxes that have long been considered impediments to attracting and growing business in Louisiana.

The phase out of the two taxes could begin next year with a 10% reduction at a cost to the state of about $16 million–the same amount budgeted for the urban and rural slush funds. This would allow the state to announce its commitment to improving its business climate and begin a phase-out that could be accomplished within the next five or six years. The $16 million first-year reduction would be less than one-tenth of one percent of the proposed $17 billion budget.

Fully implemented, the two tax changes, with a narrowly defined MM&E, would result in a total tax reduction of about $160 million a year. An economic analysis of the tax proposals by the Legislative Fiscal Office suggests that the direct impact would not be a very large factor in a state economy where the state gross product is roughly $160 billion. However, the major impact of the changes would be to improve the image of Louisiana as a place to do business. In this sense, the state would get more mileage out of the tax phase-out than it would from a number of relatively small urban and rural slush fund projects.

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