Budget plan equates "stabilization" with "inflation"

As predicted, that big breeze you felt came from Democrat Gov. John Bel Edwards whiffing on his euphemistically-named “Budget Stabilization Plan,” which more accurately should be called a “Budget Inflation Plan.”

That’s because, without all the numbers quite in, in the aggregate it asks for tax increases in the neighborhood of $608 million. It would let lapse one penny of the sales tax, expand the reach of the remaining four cents to services and transactions currently exempted, make permanent reductions to tax exceptions scheduled to revert to full deductibility after next fiscal year, amend the Constitution to eliminate the deduction for federal taxes on income (rejected in the case of corporations by voters last year), ratchet down income tax rates a percent, and institute a new gross receipts tax euphemistically called a “Commercial Activity Tax.” It also pledges unspecified reductions or eliminations of exceptions and phasing out the corporate franchise tax.

Because income taxation happens on a calendar year basis, the income tax portions would occur in the middle of next fiscal year. To make up for that, repeals of exemptions would take place at the beginning of the third and fourth quarters of 2017 while the extra cent of sales tax would stay on until it scheduled expiration.

The CAT – an idea almost universally panned by economists for its wildly differential impact on companies with the same amount of income that punishes non-integrated and/or low-margin enterprises, attenuates job possibilities, and forces prices higher – would apply to all commercial enterprises except some utilities and financial institutions (as these pay specific levies already) and could offset corporate income taxes. At turnover less than $1.5 million, a fee from $250-$750 would apply, and above gross receipts (minus returns, allowances, and discounts) would face a tax of 0.35 percent (although slightly lower than that for amounts under $3 million). If higher than the retained corporate income tax, that becomes the amount owed; otherwise, companies must pay the amount due of corporate income tax.

The individual portion would end up revenue neutral, perhaps even cause an aggregate cut. That would establish brackets of 1/3/5 percent where only those who paid a disproportionately sizable amount of federal taxes – almost none in the bottom 90 percent of filers and almost all among the top 10 percent of them – would see tax increases while most of the remainder would find this tax lowered. But keep in mind that the affected group – around $120,000 in Louisiana adjusted gross income – already pays more than its fair share, coughing up half of all state individual income tax revenues, and it would take two-thirds of both houses of the Legislature and a majority vote of the people to excise the constitutional deduction for this to work.

Yet that’s the least objectionable portion. The sales tax changes also should attempt approximate revenue neutrality based upon the previous rate with flattening, perhaps by dropping the state rate to 3.6 percent – meaning a drop of $880 million in revenue. Similarly, the $66 million gained through lowering corporate rates to brackets of 3/5/7 percent while curtailing exceptions could become reduced or eliminated by tweaking the rates downwards, or by reduction of the franchise tax (which according to the plan would wither away over a decade in some manner). And making permanent exceptions only extends the original approach, which itself took a meat cleaver to many without any rational analysis as to whether these served an important and/or cost effective purpose and/or what level at which should these operate appropriately; in other words, what reason explains why from now on the disability credit should amount to $72 instead of $100, or whether one even should exist in the tax code?

Recognize that Edwards’ blueprint, if it has any relationship to tax reform at all, just serves as a blunt instrument to raise money. Genuine reform would parse through all tax exceptions, eliminating most, and flatten rates, which enhances predictability as the use of exceptions introduces all sorts of wild cards. It also would rely more on sales taxes, which fluctuate less than income, but the Constitution hampers this by exempting unprepared food, prescription drugs, and utilities sales to residences. Property taxes act even more stably, but none statewide currently exists and the Constitution allows one only up to a level that would not contribute much.

However, “predictability” is not how Edwards defines “stability,” but rather in terms of avoiding a deficit given his spending desires, hence the accent on squeezing more money out of the public. A better way would carve out programmatic spending reductions while paring down or jettisoning unhelpful tax rebates such as the Motion Picture Investor and Earned Income Tax Credits, but that would subvert his policy agenda demanding bigger government. With the possible exception of the individual income tax swap, the plan is nothing more than garbage-in-garbage-out that the Legislature must disregard.