Sales tax increase only fair solution to LA deficit

White knuckle time has come to Louisiana’s policy-makers, but that should not obscure the fact that, given the inevitability of tax hikes, only the sales tax needs increasing.

Today the Legislature will take up again the budget-balancing issue. While the long term looms, what to do to solve the current year deficit remains unknown and most in need of urgent resolution. As the sun set yesterday, legislative rules prevented any more introductions of legislation on the tax side, so any moves that deal with taxation must take place within the confines of any legislation already passed by a chamber, with all matters settled by 6 PM Wednesday.

At that time, given the range of tax instruments already dealt with by at least one chamber, a gap of well over $100 million remained. Since appetites for further spending cuts seem lost, the question has boiled down to whether sales tax adjustments should take up the entire slack, or if some combination of income tax rate, deduction, and credit changes and sales tax exemptions on business also should enter the mix.

Republicans have backed the notion of increasing the sales tax one percent for 27 months and a little higher for 15 months that gradually dissipates, perhaps including eliminating some business exemptions from the existing four percent, a position Democrats and their partisan counterpart Gov. John Bel Edwards desperately wish to avoid. Edwards’ and they seek in the long term to keep state spending as elevated as possible using the most redistributionist means as possible, meaning concentrating on raising business taxes – conveniently ignoring that these get passed along to individuals – and preferably in the form of income taxes that would include individuals as well, on a long-term or permanent basis to institutionalize bigger government.

In opposition to sales tax increases, Democrats have taken to braying about how that means lower-income individuals pay a higher proportion of their income in taxes and that even the one percent elevation would make Louisiana’s the highest combined state and local sales tax on average in the country. But both assertions exaggerate to the point of distorting the debate over the actual impact of any increase.

Currently, at 9 percent Louisiana ranks third among the states in average aggregate sales tax (it differs from parish to parish). However, in per capita sales tax collection, it ranks only 40^th out of the states and District of Columbia. The discrepancy comes from the broad constitutional exemptions that exist to Louisiana state sales taxation, chiefly for individuals excluding charges on unprepared food, residential utilities, and prescription drugs. And because these comprise a higher proportion of purchases by lower-income households, this induces less regressivity into Louisiana’s application of the sales tax.

Using census (2006), labor (2011), and estimates (2015) of health care expenditure data, we can derive the proportion of expenses for families with at least one child, both those that receive some kind of government assistance and those that don’t, on unprepared food, residential utilities, and prescription drugs (data are national except for the utility data which are specific to Louisiana, where the households that receive aid are assumed to have two-thirds renters and the others one-third; health care data assume a family of four). We can assume the families receiving assistance, who spend on average $30,582 annually, represent lower-income households while those that do not, who spend on average $66,525 a year, represent higher-income households.

Computations show that the lower-income families have only 51.3 percent of the dollar amount of their transactions taxed, while the upper-income ones have 63.2 percent taxed. This means that the average proportion of income that goes to sales taxes for the lower-income is 5.84 percent and for the higher-income is 4.49 percent – a bit regressive, but not much.

Yet this overestimates the tax advantage accrued by those with lower incomes. As it is, average expenses of the lower group exceed its income by $3,730 a year – caused because government benefits aren’t included in the computation of income, an omission which overestimates the proportion of sales taxes paid total receipts. Looking at a minimal measure of total cash received – at least the amount spent, but total benefits almost certainly exceed this amount nontrivially – the proportion falls to 5.13 percent. And given that the average sales tax paid by this group is only $1,569 a year, you could argue that the value of benefits that more than doubles this amount sets a negative marginal sales tax rate for these families.

So protestations that a sales tax unduly hurts the poor are invalid. Chances are when taking into account the exemptions and total benefits received, little difference remains in the proportions of total receipts paid out in sales taxes between higher- and lower-income families. This validates the approach taken by Republicans in the revenue debate: if the objective is to raise substantial sums quickly, the fairest tax as it hits different income levels fairly evenly, is the sales tax.

The Republican majority needs to stand fast with sales tax hikes for relatively short periods as the answer to the current-year shortfall, resisting any attempt to alter that arrangement with, for example, trying to amend onto bills to do this an increase in the inefficient and fraud-ridden Earned Income Tax Credit on the basis that it “levels the playing field” for the poorer; the playing field already is level in regards to the sales tax. And if Edwards and Democrats complain, let the sales tax increase die and force the Edwards Administration to carry out its dire threats to close higher education institutions and kick people with disabilities out on the streets despite his campaign promises he would prevent this.

It won’t; it’ll find ways to make more sensible cuts rather than face a severe public backlash. Because Republicans can go to the public and tell it they had a solution in hand to fund everything but Edwards and Democrats rejected it, and the latter have no politically winning defense against that argument. If Republicans stand firm, the special session will produce as the only significant tax increase that to the sales tax for a limited period.