Good tax cut, after dodging red herrings, finally likely

In the wake of the presumptive tax cut coming the way of the majority of Louisianan payers, it’s important to understand what was debated in the House of Representatives, why it got there, and the implications of the passage of the bill in its final House form.

SB 87 by Republican state Sen. Buddy Shaw came out almost the way it went into the legislative process, but it took a tremendous detour to get there. Originally, it would have raised the individual income taxation threshold at which people begin paying the state's top 6 percent rate from $25,000 to $50,000 for single filers and from $50,000 to $100,000 for joint filers. This would expand the middle 4 percent rate from a range of $12,500 to $50,000 for single filers and $25,000 to $100,000 for joint filers while the lowest 2 percent rate would remain in the ranges of $0 to $12,500 for single filers and $0 to $25,000 for joint filers. These would have taken effect for the 2008 tax year.

Instead, the Senate, apparently unopposed by Republican Gov. Bobby Jindal, changed it to wipe out all individual income taxes in a decade. Many “supporters” cynically wanted this change to poison the bill so much as to force Jindal to veto it if it made it that far. The House was left with the task of dealing with it, shaped by Jindal’s announcement, who initially had opposed it, to support it in its original form. But the one concession made was that it was to take effect in tax year 2009, since both Jindal and the House leadership helmed by Republican Speaker Jim Tucker worried about the short-term impact on the budget when deficits are forecast for the next few years.

An attempt came that, in essence, would have left the amended bill unaltered in the tax elimination except that it would have sped it up to five years. It was a disingenuous amendment offered by one of the most liberal members, Democrat state Rep. Walker Hines, to re-poison it. Such a move would be genuine and serious only if accompanied by a plan to balance the budget as a result of the phaseout which Hines didn’t offer and in any event is a separate issue. This failed by a 22-73 vote.

A somewhat less dishonest, but an equally abusive alteration attempt was made, expanding the aggregate size of the cut by eliminating the 2 percent bracket entirely while keeping the other brackets in place, through an amendment by Democrat state Reps. Gary Smith and Sam Jones. They complained about how without this the cut would assist only about half of all taxpayers and that those in the lowest bracket would get no relief at all. But this argument not only conflicted with the bill’s original intent, it also contained practical budgetary problems and theoretical economic shortcomings.

The original bill sought to undo the “Stelly Plan” changes of five years ago when the 4 percent bracket was halved at the top. Shaw repeatedly said since no changes had been made concerning the lowest bracket, that there was nothing to reverse, and leaving the other brackets the same would not accomplish the reversal Shaw desired. Again, if the amendment’s authors are serious about tax relief for those who pay little, they should try a separate bill concerning just the lowest bracket.

This amendment also would have expanded the cut by $60 million. It thereby also would have created a greater budgetary problem for the immediate future, although perhaps that could have been dealt with by cuts in other areas (including legislators’ earmarks).

But the worst problem came in that its overall impact would make a badly progressive income tax system worse. In 2007, tax return filers over $25,000 in federal adjusted gross income representing less than half (45.2 percent) of all Louisiana filers paid a crushing 99.6 percent of all individual income taxes collected by the state (and note that tens of thousands of households statewide do not even have to file, so when including dependents it is likely that as many as two-thirds of the state’s residents pay almost nothing in income taxes). At the $50,000-plus bracket (capturing almost all of the joint filers in the highest bracket and the higher-end single filers), 31.1 percent of filers paid 82.4 percent of collections – probably translating to less than a fifth paying over four-fifths.

The amendment cleverly was sold as also helping out middle-class payers because at the lower half of income in the middle bracket the offset from getting rid of 2 percent of the $0 to $12,500 range for single filers ($25,000 for joint) would be greater than lopping off the 2 percent from just within that bracket. In reality, it would just have shifted the tax burden even more decisively upwards.

Tucker astutely noted in debate that that had to be at least some semblance of burden-sharing in the state and implied it was unfair to increase even further the proportion that lives off the backs of the most productive citizens in the state. The bill barely dodged this bullet when a near party-line vote with almost all Democrats in favor narrowly lost 49-50.

The compromise on the implementation date of 2009 was accepted, but also put in was a provision that would make the state have tax withholding (where about 70 percent of income taxes are collected) not be changed to reflect this until Jul. 1, 2009 – the beginning of the next fiscal year. For legal purposes, this prevents the Legislature from having to lower its revenue forecast for this upcoming fiscal year ending Jun. 30, 2009 that would cause budget fixing in the next two weeks. But in practical terms, the cut is in effect for income derived in the first half of 2009, so individuals legally can request their employers to change their withholding status for that period which means this potentially will cause budgetary adjustments to be made in the middle of this upcoming fiscal year (depending upon a large number of other contingencies).

Some observers have complained about this six-month lag in the state changing its tables, but this should not be a concern to principled conservatives many of who have voiced this objection. Conservatism argues that the individual is to rely first upon himself, and only infrequently, when individual efforts in certain areas cannot achieve a legitimate good, upon government. Thus, the principled conservative will take control of his life and this situation by requesting the adjustment himself by the beginning of 2009, rather than depending on government to do it for him later.

In all, SB 87 in its current form has many salutary aspects. It gets a realistic amount of the people’s money returned to them and in a fair way, in a reasonable time frame. Latecomer Jindal’s job now is to ensure the Senate approves of these changes and does nothing more, and then sign this first step towards long-term beneficial fiscal restructuring of the state into law.