Talk cheap on exemptions limiting revenue; action needed

One thing that veteran politicians count on in the electorate to become veteran politicians is for the electorate to have a short memory. That attitude went on full display at a House Appropriations Committee meeting last week and adds to the continued confusion over state tax policy of the last several years.

In this meeting, Secretary of Economic Development Stephen Moret gave a summary of encouraging economic statistics, principally the 4.9 percent latest (January, 2014) unemployment statistic, which places Louisiana tied for 11^th lowest among the states and District of Columbia. This led to questioning, principally by committee chairman state Rep. Jim Fannin, that improving numbers did not seem to be reflected in state revenues. Compared to last year’s budget baseline, they have improved incrementally and do not seem poised to do any better for next year.

Particularly Fannin queried about the causes of improvement on indicators translating poorly into revenues, and he and Moret batted around some ideas, which Moret emphasizing that a sputtering economy under the stewardship of Pres. Barack Obama would keep a lid on state revenue growth. In the end, Fannin seemed most concerned over the role that tax exemptions of all kinds played in turning away potential revenues from the state, which Moret acknowledged was increasing in size at a fast rate.

And upon investigation, using comparative statistics to filter out the impact of generally poor national economic performance, the point is valid. Using fiscal year 2008, which began only a few months after Gov. Bobby Jindal took office and a couple of months before a noticeable downturn in national economic activity commenced, as a baseline, then the average annual unemployment rate in the state ran at 4.4 percent, and this was at the peak of the post-hurricane disaster artificial economy. Just over six years later, while the rate has gone up, the state’s relative ranking actually improved slightly, for then it was tied for 13^th lowest. Thus, not much change has occurred, although, again, larger improvement than indicated probably occurred because of the wearing off of the artificial economy.

Again, in comparative perspective, in a related measure Louisiana shows even more improvement. The labor force participation rate in the state for the beginning of 2008 was 59.0 percent, which ranked tied for 45^th highest, but exactly six years later while subsiding to 56.3 percent improved among the states to being tied at 39^th highest as under the Obama Administration the national rate is lowest in over 35 years.

Including income and output also shows some minor relative improvement in Louisiana’s economy from 2008 to 2012. Annual average per capita income as a proportion of the U.S. average pretty much tread water, going from 92.48 percent and ranked 31^st best to 91.59 percent and tied for 32^nd, but its per capita real gross domestic product relative to the states’ average went from 96.93 to 100.84 percent. These numbers together also indicate incremental improvement.

So as far as assessing whether there has been an uptick in the potential for state revenue, a necessary condition in the first place for there to complain about bucks not showing up, the data show on the whole there has been – not a dramatic upturn, but some. Yet income tax collections have fallen in the 2008-13 period. Corporate income tax take (including franchise tax) has fallen from $995 million to $384 million, and for individual income taxes the decline has gone from $3.242 billion to $2.721 billion.

But when including tax exemptions, overall potential tax receipts in the state actually increased substantially in this period. For corporate taxes, exempted dollars went from $962 million to $1.685 billion and for individuals $812 million to $2.069 billion. Overall, that means total potential income taxes that could have been collected in 2008 were $6.011 billion and in 2013 they would have been $6.859 billion, or an increase of 14 percent over this period as opposed to a decrease of 27 percent actually collected.

Of course, one significant tax change policy during this period were the 2009 and beyond individual income tax cuts, which in the short run would reduce take from this source before the long run economic expansion these would induce would kick in. And, while tax exceptions typically are inefficient mechanisms by which to trigger similar economic growth that turns up as increased state tax revenues, they do induce it to some degree, so had they been wiped out completely this extra money extracted from those who earn it probably would have dampened the actual potential total; in other words, it’s not as simple as just taking actual take plus forgone exempted amounts to come up with what actually would have been collected without exemptions.

Yet with these caveats, it’s clear that a large increase in exemption totals has been the major explanation as to state revenue haul lagging economic growth. It also repudiates the false narrative often spread by those interests and ideologues who have faith in big government who maintain a dip in and then the slow-growing revenue picture developed because tax cuts took a chunk out of revenues. In these two metrics most attuned to income tax policy, collected and uncollected revenue growth combined has occurred at an average of over two percent a year with the tax cut, comparable to economic growth of the country as whole (which suffered an income tax increase in the last year).

However, Fannin’s response provided the most illuminating portion of the exchange, when implying that he wanted to take a look a tax breaks more broadly. If so, that would mean the third time is the charm: in 2012, a special legislative panel called the Revenue Study Commission presented a comprehensive review of the matter, including the role of tax exemptions, and in 2013 a slew of bills to begin to or to end tax exceptions hit the Legislature, only to have just one getting into law, that put back into state coffers a few million bucks by scaling back a sales tax break to vendors who paid these receipts early.

Yet Fannin acted as if none of these opportunities to address the patchwork quilted system of breaks, strung out there with no rhyme or reason as to why they exist or whether if they did not that state government really needed those forgone funds as opposed to alternative uses by keeping that money in the hands of those who earned it, ever happened. Memory may be unreliable, but surely Fannin (and every other legislator) must recall these. Just how many dedicated studies and bills coming forward does it take before legislators finally begin a serious policy debate that produces major structural changes to state tax policy?

Legislators who moan about lack of revenue and who decry the impact of tax exemptions on revenues have had every opportunity recently to do something about it. But they have lacked the political courage to do so, fearful that those benefitting by a particular tax break will attempt electoral retaliation, and so hope the general electorate forgets about the issue. With a prohibition during this legislative session on altering any exceptions to bring in more revenue, 2015, even if an election year, brings the chance finally to make real progress in this area, if lawmakers have the guts to do it. Endless musing about this only serves as a distraction from this reality.