Couple inventory tax credit change with broader reform

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.