Legislators began meeting earlier this week in the
hopes of erasing a potential fiscal year 2019 spending plan deficit. Current
spending levels less temporary taxes rolling off on Jun. 30 equals nearly a
billion-dollar hole.
A number of proposals have surfaced to address
this, guided by the parameters of the special session call issued by Democrat
Gov. John Bel Edwards.
But the Republican-controlled Legislature, especially the House of
Representatives, wisely seems unlikely to approve his first choice, increases
on marginal income tax rates geared towards higher individual earners and corporations.
Instead, the focus has narrowed to sales taxation, with four components. One is to assess the range of rates, based upon the fact that most of the disappearing revenue comes from a one cent levy on sales dropping off. The House Republican leadership increasingly seems honed in on utilizing a portion of that, not reviving the entire amount.
Another is the range of coverage. The law currently
shields many services that if made unprotected could raise a substantial sum while
letting go of the entire penny.
Still another looks at whether to include
exemptions of goods sold. Statute exempts about a hundred discrete items
partially or totally from sales taxation. Stripping these also could bring in significant
dollars without retaining the extra cent.
Finally, lawmakers must decide whether to make permanent
whatever changes they do embrace. To do so admits comfort with current spending
levels, while setting a sunset date on what they alter creates an incentive to
engage in fiscal reforms that not only could set the stage for organic revenue growth
without raising marginal rates on any taxes, but also could rein in the growth of
state spending that has contributed to bloated government.
In a way, all of these matters hinge upon the
duration question. If making permanent any alterations, this conveys a sense
that fiscal reform has happened, courtesy of those changes coming into fruition.
That’s a reckless viewpoint that does a disservice to the seriousness of the fiscal
structure issue.
For example, consider the alternatives of broadening
the base and excising exemptions. If legislation locks in services covered or
not and exceptions made or not, we would hope the choices made produce optimal
tax policy. That is, by not applying sales tax to certain items, this action would
produce greater overall net economic benefits than doing the opposite. And, presumably,
that certain items do end up taxed also would work out better than if these
also went tax free.
But, do we really know these things? Economists generally
agree that more efficient taxation occurs most broadly, as government’s picking
of winners and losers through tax policy distorts market decisions to the detriment
of optimal wealth creation (and thereby government revenues derived from that).
Yet the discussion of this issue in the context of the special session features
no debate over lowering marginal sales tax rates to achieve the optimal balance,
only broaching the broadening the base to boost tax revenues.
With paring exceptions, policy-makers know much less.
No systematic study of the costs and benefits of each exemption exists.
Jettisoning some while keeping others would occur solely on the basis of
lobbying efforts, not through informed thinking.
In short, no genuine fiscal reform can occur in
such a truncated period with so little information available. Any assertion
that the session’s product represents a serious attempt in this regard is
pretense, and any final product of it considered as such that solves for
optimal fiscal policy is foolhardy.
Thus, the simplest solution best setting the stage
for true future reform lies in a variation of the present situation: extend a portion
of the penny for two to three years (two ending during the first six months of
the next governor’s term, whether Edwards; three during a year where the
Legislature may consider tax items during its regular session). In that time, policy-makers
can derive answers to questions swirling about the impacts of specific tax rates,
coverage, and exceptions to these to make far better decisions than in the
present environment.
This session should adopt the policy option that
keeps the base state sales tax between four and five percent for two to three
years. Anything else does more harm than good.
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