Thrust into the spotlight by becoming the crucial fulcrum on which Louisiana’s fiscal year 2016 budget balances, the state’s inventory/ad valorem tax credit reflects the inefficient, strange outlier tax behind it where the abolition of which would promote fairness and better potential for economic development.
Gov. Bobby
Jindal has asked the Legislature to remove
the refundable portion of this tax, or about three-quarters of its take and
equals about $377 million, in its upcoming regular session. This could take the
form of a suspension lasting around a year, which may
require only simple majority votes, or outright repeal, which would need
two-third supermajority votes from each chamber. It rebates back to
corporations not only part or all of their income and franchise taxes, but also
part or all of local property taxes.
This odd element that state
taxpayers forgo revenue on the basis of parish taxing decisions, and the lack
of clarity and accountability for voters in understanding the impact of policy,
may be the strangest aspect of the credit and its underlying
tax. Only 10 states have such a comprehensive tax on the value of most movable
property, comprised of domestic, non-transitory resources, and finished
products, and only Louisiana oddly does not levy the tax at all at the state
level, but allows parishes to do so; only a couple of other states allow
levying at the local level even as they also levy one at the state level.
Chalk that up to the state’s
populist history with the political goal to impress voters that they individually
pay relatively low amounts, resulting in the state failing to levy its own
property taxes, capping millages at the local level, and slapping a homestead
exemption on municipal property taxation. This constellation of policy choices
disguises the true level of indirect taxation from the much higher amount paid
by non-homestead property owners, which they pass through to consumers –
including those taking advantage of the state’s highest-in-the-country-by-far
homestead exemption. Because of that large differential, which means business
is assessed about seven-eighths of all property taxes collected, in the early
1990s the state phased in the exemption at the parish level.
Yet this only has added to the
distortive nature of the tax in the first place. It disproportionately impacts
manufacturing of all kinds, while is much less burdensome to service and
knowledge industries, so the credit disproportionately favors manufacturing.
This compounds the disconnection between where taxing policy gets made, the
local level, and where its presence impacts fiscal policy, the state level. To
put it another way, large manufacturing firms have no incentive to lobby
against property tax hikes because under the current law that tax is irrelevant
to them as they don’t pay regardless, and local authorities face that much less
resistance to hiking such taxes.
The prism of its distortion
emanates further as the tax its associated credit create great
inequities in tax policy and impact. The larger the proportion of large
firms’ economic activities in a parish, in essence the more state taxpayers
subsidize that parish, making for a problem not only in clarity of lines of
policy accountability but also in fairness.
In this sense, the differential
advantage conferred to some businesses and parishes at the expense of the state
taxpayer registers as a symptom of the disease of the presence of the tax in
the first place. If not for a tax eschewed by most states because of its
peculiarity of taxing finished products and their components in addition to the
means to make them, none of these politically or economically distortive
effects would occur.
Yet this metaphor does not capture
the true nature of the ailment’s cause. Just as something like fever and
coughing may be symptoms of pneumonia, the pneumatic condition itself may stem
from a meta-affliction such as AIDS weakening the body’s immune system. And in
this case, that meta-disease is the skewed property tax system that causes the institution
of an inventory tax at the local level that elicits the state tax credit.
Tax systems that spread
out collection the most at the lowest rates most efficiently collect revenue
– the exact opposite of Louisiana’s which extracts a lot on a few, a little on
some, and none on many. Thus, ideally, the inventory tax ability of local
governments and therefore the credit would be done away with entirely, which
can be done by changing the relevant statute that
defines taxable movable property, but only if also the homestead exemption were
lowered, which would take a constitutional amendment
that could not be in place prior to the start of the fiscal year. This would
have the effect of substituting back in to some degree for the inventory tax at
the local level revenues from homeowners, and also would capture corporate and
franchise taxes from currently-exempt large concerns that pay none where
ironically smaller concerns, particularly those in the service and information
areas, do now pay.
The net result would be many
citizens paying higher taxes at the local level and some businesses paying
higher taxes (plus receiving no refunds) at the state level. But the citizenry
can take that up with their local governments that have gotten in some parishes
a heavily-subsidized ride no matter how high they pushed their tax rate. Big
business in particular would have to bite the bullet, but relief also can be
offered it and all business, in the form of an eventual ridding from the state of
the corporate and franchise taxes, which in and of itself would be excellent
tax policy.
So, the session could produce bills
that would exclude taxation of what today would be considered “inventory,” meaning
only the credit for corporate income and franchise taxes remain; that would put
before the voters this fall a lowering of the homestead exemption to a more
defensible level ($25,000-$50,000 in valuation, or perhaps paying on the first
$10,000, then exemption up to a certain level); and that would gradually eliminate
the corporate income and franchise taxes starting next fiscal year (say over
five years, which at its conclusion entirely moots the credit) that executes
only if the amendment passes. Some businesses, but with plenty of assets, take
a big hit this fiscal year then get relief as these taxes disappear, and many
homeowners take a hit if they cannot convince their local authorities to lower
rates, with some still paying more in taxes, but a pittance more for most of
these.
That asks a lot in an election year
(and keep in mind almost all parishes have elections for their governing
authorities this year as well), but the immediate concern of balancing the
state’s budget and the more distant issue of shaping a tax structure that does
a better job of collecting revenue through encouragement of economic
development demand a lot as well. Let’s hope visionary actions aligned to the
agenda above don’t get short-circuited by special interest politics during this
session.
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