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Delaying tax cuts should be considered, PAR says

An individual income tax reduction passed during last year’s legislative session will reduce state tax revenue by around $360 million for FY10 and will lower taxes by up to $500 for individuals and $1,000 for joint filers. The elimination or delay of this tax cut should be revisited as one of the possible alternatives to mitigate the severe budget cuts that will be necessary to balance the budget for the upcoming fiscal year. The additional revenue would give budget makers more time to plan a smart and meaningful streamlining of government in preparation for an even more severe budget crisis on the horizon.

Combined with other significant tax cuts passed in recent years, this tax bracket adjustment contributed to the $1.3 billion revenue decline projected for the upcoming fiscal year. The FY 10 executive budget proposes more than $400 million in cuts to health care spending and more than $200 million in cuts to higher education. Legislators and administration officials are claiming the cuts are both regrettable and unavoidable. Yet, they could be tempered by considering all options, including the delay of scheduled tax cuts.

A separate tax cut passed in 2007 will decrease state revenue by $308 million in FY10, according to the original legislative fiscal estimate. This phased-in state deduction for excess federal itemized deductions affects roughly 20 percent of taxpayers (those who itemize). For the 2009 tax year, the phase-in will be completed and 100 percent of the deduction will be allowed. Sixty-five percent of the full deduction was allowed in 2008. A delay of the final 35 percent should be considered and debated among the options to allay more than $100 million in hastily crafted budget cuts.

Many people believe that state government is bloated with unnecessary spending, but now, being forced to identify the budget fat, they seem to be caught off-guard by the difficulty of finding it. Yet the state’s budget makers laid the groundwork for the severity of the fiscal problems facing the state with their own actions. The income tax reductions passed in recent years eroded the broad base a progressive tax structure should have and, unlike some of the other recent tax reductions, were not designed to stimulate business growth.

The growth in state spending must be slowed to adjust for the new economic reality. However, no one has developed a plan for how to do that without gutting the state’s ability to support essential higher education and health care services. Healthy and educated citizens are necessary to improve the long-term economic prospects of the state. It is haphazard policy to force major expenditure cuts without providing a well-formulated plan to make them.

PAR warned last year that any permanent reduction in taxes in response to a spike in volatile revenue sources would threaten the stability of future budgets and could send the state into an economic crisis. (See “PAR Says Proposed Tax Cut is Shortsighted Fiscal Policy,” May 30, 2008.) Indeed, that prediction is coming true, but legislators and the governor can still correct the mistake they unanimously supported last year.

The tax bracket adjustment lowered from 6 percent to 4 percent the rate charged on taxable income between $50,000 and $100,000 for joint filers. For individual filers, the rate was lowered for income between $25,000 and $50,000. The change left alone the 2 percent tax on income up to $25,000 for joint filers ($12,500 for individual filers) and the 6 percent tax on income above $100,000 for joint filers ($50,000 for individual filers). The maximum possible tax break for joint filers is $1,000 and for individuals is $500.

Because the new Department of Revenue withholding tables associated with the tax break will not be adjusted until July, most taxpayers have not seen this tax reduction in their paychecks. If the tax break is delayed by action this legislative session, very few will notice the difference. Similarly, the expanded deduction for excess federal itemized deductions is not set to be taken until taxes are filed next year.

Delay or elimination of both the tax bracket adjustment and the additional state deduction for excess federal itemized deductions should be considered as viable options to alleviate the pressure to downsize state government in a hurry. The additional revenue would buy time for a thorough re-evaluation of the state’s spending priorities in order to formulate a balanced approach to containing costs while supporting the public services necessary to keep the state’s economy moving forward. Slashing revenue without presenting specific proposals for cost-cutting is a slick political maneuver that merely masquerades as a way to streamline government. Louisiana cannot afford to ignore either side of the budget equation.

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