Bad theory, selective outrage mark anti-tax cut screed

Once again, the usual suspects, with little merit, complain about tax reduction in Louisiana, telling us more about their preference for big government than any useful public policy prescriptions.

A week after it seemed to have caught smaller-government fever against type, the Baton Rouge Advocate editorially went back to its old ways by highlighting a warmed over report, the gist of which already has been critically examined, chastising the state for reinstating deductions and marginal rate cuts to state income taxes. In the end, it concludes that these actions were unwise because they took revenues from the state.

Such a view shows a vast ignorance about economics and how the world really works, and disregards that state government’s fiscal difficulties come from its revenue-raising structure and overspending. Its most basic mistake is that it relies upon a model of tax policy that is unsustainable in theory and in data, a belief that taxation rates do not affect human behavior.

Simplistically, the report from the Louisiana Budget Project – a creature of the Louisiana Association of Nonprofit Organizations – relies upon static revenue forecasts from the original bills that, first, reinstated (and actually relatively increased) deductibility, then, second, lowered marginal tax rates. These were snapshot guesses from years ago that made a static assumption about people – that the amount of money not coming into government because of the cuts, when used by the private sector, did not produce more tax revenue because of people’s use of it. This view makes no theoretical sense because the private sector is a much wiser and more efficient user of resources than is government. Simply put, the more money in the hands of the people, the greater productivity economically comes out of it, boosting tax revenues. The economic growth that results may even offset the loss in tax revenues, depending upon other factors (this summarizes that effect).

Amplifying this impact is that the nature of the cuts disproportionately put money in the hands of the higher-earning households, who acquire wealth precisely because, in a semi-free market economy, resources accrue to those who make the best, most efficient use of them. This helps raise the tide of society’s overall wealth higher, lifting household boats higher. And it’s not like they aren’t paying their “fair” share. At the end of fiscal year 2009 (right before withholding at the new lower rates kicked in), filers making over $50,000 a year – about a third of all filers which includes single people and married or jointly filing households – paid a crushing 84 percent of total Louisiana state income taxes, or an average of about $3,686 per filing, while the remaining two-thirds of filers paid less than a tenth of that, around $357.

(The editorial also repeated an oft-made error, that a fifth of all taxpayers only file deductions. Actually, that is a fifth of all tax filers since many never have to pay any Louisiana state income tax or file in order to be able to take advantage of tax credits or other purposes. A much higher proportion of those who actually pay taxes take one or more deductions.)

The number used also does not take into account that a forecast of years ago often bears little reality to present conditions. The Legislative Fiscal Office was a as surprised as everybody else about the severity of the economic retrenchment which affected income tax take, meaning the estimates of what the reversal would “cost” were too high. Therefore, part of the reduced revenue picture for income taxes is not a result of the rollback, but by a sputtering national economy that shows few signs of revival anytime soon.

Thus, this “cost” is an overestimation of an unknown, but likely significant, magnitude. It does not factor in forecasting error, nor does it acknowledge the reality that tax cuts stimulate economic growth that produce higher tax revenues – not a great amount in this, the first year of it, but over the next few years it will multiply. So, when an estimate of $649 million is said to have been “lost” by these changes, in reality the figure is less, perhaps much less. And, because of the economic growth the cuts will trigger, in a few years that “loss” will turn into a surplus.

We know this because of past data. One indicator is change in the rate of increase in individual income tax collections relative to the overall change of the rate in increase in gross state product – the economic output of the state’s production. From fiscal years 1990 to 2002, before the “Stelly Plan” change that raised taxes on all but the lowest level of taxpayers, Louisiana’s GSP went from $91.4 billion to $134.6 billion, while its individual income tax collections went from $677 million to $1.789 billion – increases of about 50 percent and over 250 percent, respectively. But from then through 2006, the increases to $193.1 billion and $2.512 billion are about the same rate, just above 40 percent (the next couple of years get hard to judge because of hurricane recovery cost distortions, with the deduction part of the Stelly reversal happening beginning in 2008, and the reduction part in 2009). In other words, higher rates depressed economic growth that kept overall total income tax take down from where it would have been at lower rates.

But besides its errors in economic theory, the Advocate’s view ignores other considerations. It completely discounts expert advice to create a fiscal structure to capture revenues more efficiently. For example, instead of spreading out payment, Louisiana allows too many exemptions to its sales tax – just the food, utility, and uncovered services tax revenues forgone the LFO estimated cost almost $1 billion a year. (The tax rate rollbacks in fact followed expert advice, of flattening rates.)

Nor does it consider getting rid of genuinely unproductive tax breaks. What about the wasteful spending on film production tax credits, which return less than 17 cents on the dollar to the state, which the LFO estimated cost $125 million in forgone revenues? Or the earned income tax credit, which because it goes to the least productive workers generates next to no economic growth, which took away $41 million? Why does the Advocate pretend these nonproductive revenue-sappers don’t exist yet it rants about policy that promises in the near future to produce far more revenue?

And it doesn’t even address the real reason for fiscal difficulties, state spending, at a macro and micro level. Not only does Louisiana rank fourth in per capita spending on government and 12^th in workforce numbers, showing how inefficiently it is, but even in these lean times a number of wasteful programs continue to operate, such as paying nursing homes for empty beds. (Of course, the report authors have no desire to delve into this side of the equation, especially not to criticize such things as “members’ amendments” because they get taxpayer largesse from that spending.)

Understand that the Advocate’s interest is to grow government by championing its ability to take more of the people’s money. Ignoring economic reality, turning a blind eye to the consequences of the programs it ideologically favors, and a refusal to view holistically the question of what is the appropriate level of revenue raising given the genuine needs of the state explain why, through criticism of tax cuts, it trusts you less than state government to control your own resources.