LA income tax repeals practical, desirable in near term

While some can’t move beyond simplistic bromides concerning the issue, whether to eliminate over time personal and corporate income taxes in Louisiana deserves a serious, analytical response – conclusions showing that given other changes the former is a reasonable goal in the near future, and the latter can be realized in the present.

For fiscal year 2009-10, the state reported $2.24 billion in collections for the individual income tax, and $435 million for the corporate income tax. Note that the former in just two years fell about a billion dollars, and the other over a quarter billion. State government did not bolt and padlock its doors in the interim, thereby demonstrating that large cuts can be made without any significant reductions in the level and quality of service. As such, “replacing” revenues “lost” by termination of these taxes need not be a policy outcome of the change, but let’s assume this in the analysis going forward.

The corporate tax figure certainly is in reach almost immediately, although structural changes needed would have to happen over the next year so this could go into effect starting Jul. 1, 2012.

First, the Legislature adjusts the reimbursement methodology for nursing homes; by bringing them in line with other states’ standards, it would save about $100 million. Second, it eliminates completely appropriations for “member amendments,” or earmarks, saving another $35 million or so. Third, it changes the way the state levies and administers the state sales tax, with its many current exemptions, in order to boost collections by $300 million. Implement these three changes by the end of fiscal year 2011-12, and that makes up the entire loss.

Reducing the individual tax figure to zero will take years and several tactics, but it should not be dismissed out of hand. Cooperation between the State Civil Service Commission, in passing a pay raise plan for classified employees that ties merit to performance that would reduce the amount of money given out as raises from four to two percent on average, given 2009-10 figures, would save $31 million, and the Legislature and governor to cut 5,000 jobs (assuming the current full-time equivalent ratio of two classified to one unclassified post, and including the forgone salary increase above as those jobs no longer would exist) from state government would save an additional $250 million. Given the small spans of control in state government indicating too many bureaucratic layers and high rate of state employees per capita, over the span of a year this could be accomplished with little difficulty.

Also, the state needs to get rid of its economically inefficient earned income tax credit, which gives money to tax filing households with an earner that pay no income tax, which would save around another $45 million. Reviewing again the nursing home payment methodology, the state pays about $23 million for empty beds; eliminate that subsidy. Combine with the figures above, and now it’s up to nearly $350 million more, and there are additional policy changes that would continue to push that number higher tens of millions of dollars at a time.

However, the most significant maneuver to fill in the gap would come not from programmatic and policy changes, but from changing the way in which the state allocates its other revenue collections. Presently, with so much (about 71 percent) of its proportion of revenues dedicated, the straitjacket on the uses of money allows huge balances to collect in hundreds of funds – some necessary reserves, but a significant portion unlikely ever to be used for their putative purposes. This has led to the practice of these “one-time” funds being reallocated on a piecemeal basis to fill budgetary gaps. By reforming the system to give appropriators much more flexibility in funds usage, these dollars initially can be directed to higher-priority uses, increasing the revenues on hand annually. This could free up hundreds of millions a year to balance out no personal income tax revenues.

Finally, note that static analysis has been used here. In reality, economic activity set off by the elimination of these would swell the state coffers by other means through other avenues, principally in the state’s biggest source of its own collections, the sales tax. Thus, the “loss” of $2.675 billion yearly actually would not be nearly this much.

With little disruption Louisiana could wipe out its corporate income tax in a little over a year. With some planning, in not much more time the same could happen for personal income taxes. Even reductions of their rates, say to a flat two percent for both without any exemptions, would be a help and could be done quickly without waiting on the more complicated and extensive reforms mentioned above. As such, creating an imperative to get policy-makers thinking along these lines by advancing legislation to do away with both taxes is responsible and does the state a service.