Increasingly both lawmakers and
analysts have decried
the presence of some of these on the books as sapping the state’s revenues
for little beneficial impact. The trenchancy of this condition has accelerated
as the state continues to fight its way past revenues over the past few years
that struggled to keep up with escalating costs. Some lawmakers hope to deal
with this issue in the upcoming legislative session, but the constitutional requirement
of a two-thirds vote this year to disband these plus Gov. Bobby
Jindal’s strong tendency to see these as tax increases the concept of which
he doesn’t support makes that difficult. And as in 2016 constitutionally the
Legislature cannot take up these items in a regular session that may push back
reforms until 2017.
Yet a number of states lead by
Republicans are looking to make tax cuts in this coming years. Fresh off of
elections that in some cases brought them to power and in other cases increased
their majorities – in some cases because they cut taxes – these states look to
continue momentum in this direction, even if cautiously
given that some states have budget environments not dissimilar to Louisiana’s.
Their lessons, added to those
learned with the Pres. Ronald Reagan
cuts at the national level in the early 1980s (even if partially undone in the
latter part of the decade), should lead to three caveats in regard to the basic
underlying theory: that diverting money from the less-efficient government
sector to the more-efficient private sector produces economic growth reflected
in tax revenues collected by government. The trick is to ensure that, over
time, enough replacement revenues can be generated to fulfill genuine spending
needs.
One condition is to know where the
state’s tax rate rests on the “Laffer Curve,” which is a curvilinear function
based upon revenue collected at a given tax rate. Simply, higher than a certain
rate begins to depress total revenues because it leaves too little capital
available in the private sector to create sufficient wealth to offset the money
confiscated. Higher-tax states like California may be closer, if not past, the
apogee of the curve, meaning tax cuts actually might produce more revenue or
lose relatively little than with lower tax states.
Another is that this decision must
be made in the context of what spending truly is needed in a state. Few, if
any, states probably are on the right side of the curve, so even as increased
private sector activity boosts revenues, they unlikely will match through this
policy in isolation what is forgone in tax cuts. But if the state is spending
superfluously on tasks that do not need to be performed by government, then
those activities should be eliminated and no shortfall is created.
Finally, there must be recognition that
while the decrease in revenues will happen overnight, the eventual regaining of
at least some of them will take time to manifest. It’s easy to stop collecting
but changes in productivity and investment patterns evolve only slowly. Thus,
it takes political will and patience to see them through, also a good recipe
for making spending cuts if need be.
Reviewing Louisiana’s situation,
the opportunity for spending cuts seems minimal, given the relatively
standstill budgets of the past few years that effectively have been balanced
through improved efficiency and through small
reductions to a handful of relatively unneeded tasks. This is not to say that
more could not be done – the relative
generosity of total compensation to state employees, both on the job and
after leaving it, compared to those performing similar tasks in the private
sector is an obvious starting point – but that the impact of those in terms of
reducing spending would be felt significantly only down the road, and should
not be counted upon for the short term.
Also, Louisiana’s income tax burden
is below
average among the states and therefore likely on the left side of the
curve, meaning reductions should occur only when the budget is in better shape
and/or gradually over time. This argues for revenue near-neutrality in any
income tax cutting.
And points to the strategy to
remove tax exceptions. Policy-makers could begin by, for example, phasing out, or
even wiping out for next fiscal year, corporate income taxes, which at fewer than $300
million in FY 2013 hardly constitutes any more than the amount forgone with
the wasteful, less-than-a-quarter-back-on-a-buck-spent motion picture investor
tax credit estimated
for that year in exchange for phasing or wiping out that credit. Throw in
more such credits, and more rate reduction could be done and/or more quickly. Plus,
there’s a bonus in tax simplification added to letting corporations keep more of
what they earn that can be reinvested and/or released to the larger economy
that reduces costs and makes even more capital available.
Eventually, comprehensive
tax reform can improve matters further, but that should be a goal for the
next governor and Legislature. But prior to their seating, this strategy of
swapping exceptions for reduced rates is possible now because it overcomes
political objections in an election year where many policy-makers look ahead to
reelection or election to other future offices. These politicians should make a
New Year’s resolution to undertake such actions.
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