Deeply flawed bill for income tax repeal is poorly conceived
A Senate bill for a 10-year phase-out of the Louisiana personal income tax has been working its way through the Legislature this session and now is poised to pass the House of Representatives. House passage would send the measure at a critical stage back to the Senate, which would decide whether to concur with the House version and send the bill to the governor’s desk.
In its current form, Senate Bill 259 by Sen. Rob Marionneaux, D-Livonia, does not present an adequate plan either to cut the state budget or identify revenue increases to offset all or some portion of the income tax reduction. The implication made at most every stage of the bill’s progression was that the tax cut would be paired with some other forms of revenue increases, such as the elimination of special tax exemptions, credits or rebates. The author’s key debating tactic for his bill has been to show posters and mega-lists of the state’s numerous tax exemptions and rebates that could be eliminated.
And yet, not a single countervailing revenue enhancement is contained in the bill. This posture provides lawmakers with the luxurious position of calling for a tax decrease without having to summon the courage to identify which tax increases would provide an appropriate balance. Based on the debate so far, it is clearly a tax decrease with a built-in impetus for an eventual tax increase. Those especially who support lower taxes and less government spending should insist on knowing the full story.
The individual income tax is the largest single source of state tax revenue. The state expects to collect $2.8 billion in personal income taxes next year, accounting for more than a third of the state general fund. Louisiana’s personal income tax levels are 14 percent below the national average, according to the Institute on Taxation and Economic Policy. Louisiana’s property tax levels are 47 percent below the national average and the state has the lowest per-capita property tax burden in the nation. Louisiana is 65 percent above the national average in sales and excise taxes.
The Senate bill’s phase-out would begin in the 2014 tax year and reduce personal income tax collections by $120 million the first year, $463 million the second year, and so on until the full impact is felt in 2024 at an estimated annual amount of $5.4 billion.
Getting rid of income taxes would not necessarily get rid of the state’s multiple forms of refundable credits and rebates, which still could be awarded without an income-tax system. (Nonrefundable tax credits presumably would become irrelevant, although it is possible some of those could be converted to refundable credits.) Under Senate Bill 259, there is no guarantee that these forms of breaks would not continue to be transacted, and in fact they have proven to be popular with the Legislature. This gap in the legislation creates a huge unknown factor about the bill’s impact.
Senate Bill 259 contains a list of proposals and mandates to consolidate or trim government operations, some of them worthy ideas that emerged from the state’s Streamlining Commission. Some of the ideas
require additional legislation, some are speculative savings, some describe programs already under way and some could cost more money to implement new programs. In all, they do not guarantee or
enumerate a cost-cutting package that can be said with confidence to address the magnitude of the proposed income-tax cut.
To pass, this tax cut needs a simple majority vote of both houses. In future sessions, any reversal of the decrease, even a partial one, would require a two-thirds vote of both chambers. Any change or suspension of state tax exemptions or credits by way of a bill or resolution to increase revenue also would require a two-thirds vote, according to the House leadership’s interpretation of the Constitution.
Many senators who eventually supported Senate Bill 259 asked to see a plan for how the income tax repeal would be addressed by the elimination of tax breaks or spending cuts. When the bill passed the Senate, it did not contain a specific revenue adjustment plan but it at least had a plan for a plan. The bill called for a commission composed mainly of legislators to review the state’s tax structure and resources – with a close eye on potential elimination of special tax breaks — and make recommendations to the Legislature, which then could do whatever it liked. The idea was that no tax cut would be implemented without an agreed-upon plan.
That version of the bill basically would have put the debate back at square one for the session next spring. But this commission idea, as it stood coming out of the Senate, at least had the value of instructing someone to figure out an overall plan before action was taken on a massive tax cut. The House committee changed the bill to put the tax cut in force no matter what the commission might suggest. So now, under the current status, not only does the bill lack a balancing plan, it does not even have a plan for a plan.
A logistical problem for the bill stems from the fact that the 14-member study commission would have seats for 10 legislators, including the House and Senate leaders and several committee chairmen, or their designees. Their commission report would be due Jan. 6, 2012, just days before their four-year legislative term ends. For some, the fall election will be a significant distraction from their commission duties. Six of those designated members are term-limited (they could run for a seat in the opposite chamber) and all of them would be lame ducks in terms of their Legislative leadership roles. An ineffectual commission with an unclear goal and no clout, served by solons with diminishing influence, sounds like a pretty big waste of time.
Before this session, discussions about the budget shortfall offered the prospect that the Legislature might engage in a nuts and bolts examination of Louisiana’s many tax exemptions, credits and rebates that add up to approximately $7 billion annually. That did not happen. As ripe for plucking as that huge figure might seem, a more focused look at each program reveals some tax breaks represent carefully conceived and well-supported tax policies, such as the sales tax exemptions on prescription drugs ($238 million) and on purchases of manufacturing machinery and equipment ($18 million).
To dig deeper and conduct a real evaluation of most of the exemptions, the Legislature and the public face an information obstacle. Look for a moment at the state sales tax exemptions, which make up most of the state’s tax breaks. They add up to $3.9 billion, not even counting the Stelly Plan sales tax prohibitions on groceries ($341 million) and residential utilities ($152 million). More than 83 percent of the $3.9 billion is attributable to myriad sales tax exemptions that the Louisiana Department of Revenue is unable to break down on a program by program basis because of the way the state income tax forms are constructed. Number crunchers can make educated guesses about how big a tax break each individual program represents, but reliable measures are a mystery. When a commission or legislative body finally sits down to identify which tax exemptions are having a positive impact and which might best be ended, this data problem will hit them in the face. This is a problem that can and should be remedied with better tax forms and reporting.
Proposals for personal income tax reductions should be evaluated from the standpoint of their impact on business, individuals and families as well as on state government. Tax cuts put more disposable income in people’s pockets and could help stimulate business and the economy. The state could become more attractive to entrepreneurs and retirees. If poorly or rashly implemented, the cuts also could put health care and education services at risk for people who rely on government programs, such as public schools.A giant cut in income taxes without a genuine plan for financial stability could harm the state’s credit rating, which in recent years has climbed to respectable levels due to a long, hard climb of fiscal reforms and improved budgetary practices.
A cut in individual income taxes could be a cover, ultimately, for a shift toward a greater burden on property taxes, sales taxes and business taxes. If the cut is going to be made, all of the interested parties – government, citizens and businesses – should receive the courtesy of knowing what the state is getting into. In the bill author’s defense, he appeared to want to create a proposal for a balanced approach but did not succeed. Now the bill is fatally flawed and should be withdrawn. Raising the hopes of citizens that personal income taxes will be reduced without identifying how to fill or close the gap is wimpish. As seductive as it might be, Senate Bill 259 doesn’t come close to providing a vision or plan of its actual, ultimate impact.