Temporary tax extension best for LA fiscal reform

The best alternative for Louisiana to deal with a looming budgetary shortfall lies in continuing to do the same thing.

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.