Good LA tax reform idea faces daunting odds

Louisiana’s task force instructed to produce fiscal reform has suggested, very wisely, the elimination of the inventory tax. Not only will that need other changes attached, but also a lot of luck to succeed.

At present, Louisiana is only one of a handful of states to tax inventories. Many kinds of goods for sale sitting around the Constitution deems taxable, which creates not only a generally undesirable burden on businesses as a whole, but also specifically creates winners and losers in that certain businesses would have huge liabilities while other kinds little, if any. As such, typically taxation experts frown upon the concept.

To level the playing field, Louisiana refunds to businesses these property taxes levied at the local level. This only compounds the horror of the tax, because it makes the amount paid by state taxpayers completely determined by local authorities in aggregate. It becomes a crazy subsidization scheme where local jurisdictions with a high number of business with a large volume of inventories can jack up rates to suck in money statewide.

The Task Force on Structural Changes in Budget and Tax Policy has signaled it will propose an elimination of the tax on inventory, likely gradually over an extended period, when it reports Nov. 1. It recognizes all of the reasons above demonstrating the unsuitability of the definition of property for taxation including inventory, and also the illogic of the state rebate, which it wants also to eliminate over time.

Which is why its plan will get fought tooth-and-nail by local governments. Together, local governments will lose over $400 million annually in tax revenue, meaning in the offing comes a combination of spending cuts and/or tax increases in other areas. In this new environment, taxes previously not paid by local residents they will have to assume, meaning these will have to go up for somebody, and local elected officials fear that too many of those somebodies will gang up to vote them out of office.

Especially some governments that disproportionately enjoy fruits of the rebate will squawk, although they do have a point in that state government often exempts larger projects, keeping these decisions out of their control. Democrat Gov. John Bel Edwards, who set up the task force, tried to address that by ordering a board filled with his appointees to be more selective in doling out these exemptions for five and ten years, but did so in a way that only politicizes the process.

Regardless, these governments will lean heavily on legislators not to amend the Constitution to exempt inventory, needing just a third of the member in one chamber to disagree with the proposal. Even if such an amendment escapes, they will lobby voters to reject it. They might be less successful in getting a majority to oppose repeal of the statute ensuring the rebate to payers (minus income or franchise tax liability), but they still would collect from them even if they failed on this item, perturbing policy-makers less.

Thus, quite a battle will ensue, but reformers can make their task easier by reforming other aspects of taxes that would allow offsets for lost revenues from the alteration easing local government concerns. For example, the tax exemption process can include more objective criteria and local government input through statutory adjustment. Another constitutional amendment could lower the homestead exemption and/or remove it for a base amount that addresses another highly negative aspect of Louisiana’s system: property taxation falling so heavily upon business.

Even with these other modifications, the net impact almost certainly would have local taxpayers bearing a greater burden while removing that of state taxpayers, and thus local governments will resist. If Louisiana’s populist history demonstrates anything, it’s that elected officials show no reluctance to transfer benefits to their constituencies when others pay the tab. Ultimately, that ethos may condemn this sensible reform to failure.