Jindal has right idea to swap tax breaks for lower rates

There’s a right way and a wrong way to perform tax simplification, and it would appear the most important figure at the anticipated outset of the task in Louisiana has got the right attitude about it all.

During last session of the Legislature it resolved to study the tax break structure of the state. Around $4 billion, or something approaching a third of all potential taxes collectible to the general fund, get shielded from collection by the state as a result of a myriad of such exemptions. Because of tight budgetary conditions over the past few years, covetous eyes have turned towards these in the hopes of the abolition of some of these might make up some revenue ground.

As it is, many of these exemptions are narrowly tailored to favor a certain activity, and often the narrower they are, the less revenue forgone exists. At the same time, even recapturing these revenues does not come without a price, as the extra economic activity produced by their presence disappears with theirs, chipping away at revenues.

Yet in this task, the overall goal cannot be perverted into an exercise of finding money to spend. Instead, the purpose should to create an optimal fiscal structure that encourages economic growth that pays off sufficient tax revenues to pay for right-sized government. Thus, it was encouraging to read Gov. Bobby Jindal’s brief remarks concerning the effort beginning by September with a report issued next Feb. 1: “We’re opposed to raising taxes, but we’re open to any review of the tax code that would make it fairer, flatter and lower for Louisiana businesses and families.”

So, for example, without all the exemptions, the corporate income tax collection would have been in fiscal year 2012 $1.657 billion. One of these, the net operating loss deduction, makes up almost a fifth of that total and almost doubles the actual corporate tax paid, although not every corporation loses money (although apparently over 28,000 last year claimed they had within the past 15 years as losses, limited in what can be claimed in a year, can be carried forward that long). Perhaps then just wiping that out and then collecting a flat two percent from all, rather than the progressive 2-4-6 laddered rates, might provide for greater revenues than currently enjoyed, as it would create an incentive for corporations wishing to reduce their tax burdens not to engage in money-losing activities but instead to put more into productive activities whose returns relatively increased as they marginal tax rate on them decreases.

This is the posture to put the exemption regime into. As a portion of the cost of business for each firm, with expanding business encouraged by a lower, flatter rate, taxes as that portion may actually go down because economic activity increases more. In the aggregate, the state may collect more because of creating incentives for investing in more productive areas, producing more revenues to tax even if that is at lower marginal rates.

Thus, the outcome of this cannot be to “find” revenues to suck into a state budget still in need to trimming. It must be to lower marginal rates as compensation for reducing amounts exempted. Hopefully, the commission studying the matter will adopt the same outlook as has Jindal as one of many needed repairs to Louisiana inefficient fiscal structure.