Report points way to future LA tax cutting, simplification

The Tax Foundation’s annual report of state business climate, or at least a segment of it calculated on the basis of state and local tax burdens, reminds again of Louisiana’s unusual tax structure, giving some commentators an opportunity to make declarations ranging from the timid to ludicrous, but also highlighting that some minor tweaks could create a more efficient system that stimulates growth in tax revenues by shifting revenue sources around to allow room for tax relief.

The report notes the state ranks 32^nd of the states and District of Columbia. Actually, on most parts of the index, which research has shown to be a good measure of economic growth potential, Louisiana doesn’t rank that poorly, in the upper half (meaning lowest half of aggregate rates) of individual income tax policy and property taxes, the upper third in corporate income taxes, and fourth-best on unemployment insurance taxes. What really knocks it down is its third-highest score on sales taxes, with a weighted state/local average of 8.85 percent.

This perturbed Treasurer John Kennedy, but who didn’t make anything other than a general recommendation about changing it by than repeating the truism that lower rates and broader coverage made for the most efficient system. He did say specifically what he called “unnecessary” individual and corporate income taxation exemptions should be eliminated, which would create a broader base.

At least he didn’t draw an entirely incorrect conclusion, which befell the director of the leftist Louisiana Coalition for Progress Melissa Flournoy. She saw the information an excuse to pursue the wrong thing, increasing income taxes, and implied perhaps then sales taxes could be cut on the basis that they are regressive in nature. That means the lower the income of a payer, the higher the proportion of income gets paid in that tax, as opposed to progressive taxation such as through an income tax regime where rates rise as does income. Forgone revenue because of income tax rate cuts, she asserted, has caused revenue shortfalls to match Louisiana’s spending.

Unfortunately, joining many of her ilk, she continues to wear a blindfold when it comes to understanding the appropriate amount of revenue the state should have. Louisiana has a spending, not revenue problem, as indicated by its high per capita government spending costs and that Gov. Bobby Jindal continues to shed unnecessary or reduce to an appropriate level functions and make state government work more efficiently with no significant ill effects on the state. The appropriate policy response is to right-size state government, not to use overspending as an excuse to take more of what people earn.

She also obviously does not know what economic research reveals, that the greatest economic benefits come when taxation concentrates on consumption taxes more than those on income. Not only has this been demonstrated empirically, but inevitably so given theory: those who produce the least for society, as indicated by smaller incomes, are the least likely to invest money for purposes of greater productivity that ends up helping all. By contrast, higher earners – often garnering higher incomes precisely because they have been so productive and expanded upon their modest initial resources by activities that benefitted society greatly that causes more income to come their way – are much more likely to use funds not taxed for much more productive purposes.

A much better strategy would take what Kennedy argues in terms of simplification, and then do the opposite of what Flournoy mistakenly suggests. Sales tax exemptions should be done away with along with most income tax exemptions, perhaps all except for a low floor below which earnings aren’t taxed, in exchange for a flat, lower income tax rate with perhaps even relief on the sales tax rate. Corporate income taxation could be done away with entirely – and now would be a good time to do it as the combination of the policies of Pres. Barack Obama creating a tepid if not ill economic recovery and of the incentives Louisiana law provides for funneling business income through individual vessels (such as limited liability corporations) having dropped the state’s latest take from corporate income taxes to below $200 million annually, so it would not be missed that much relatively speaking, yet doing so would set off increased growth that soon would recapture increasing portions of that revenue through individual income and sales taxes.

As this looming legislative session is in an even-numbered year, exemption elimination constitutionally is not possible, and would work politically only if compensated by marginal income tax rate reductions or eliminations. Perhaps such a big agenda dealing with revenue is what awaits in 2013, after this session tackles other momentous fiscal issues that, if by passing the Jindal-proposed budget somewhat near to its present form, will have addressed the spending side of the equation.