Use special session to break from old tax model

That Gov. John Bel Edwards endorsed sham “tax reform” in his recent special session call becomes all the more apparent when another example surfaced of Louisiana’s subpar fiscal policy.

In the days prior to the session’s launch next week, the state announced Gameloft would close its New Orleans office, reneging on a deal to bring more jobs to the state. This meant it gave away nearly a million dollars over the past seven years to the gaming firm under the Digital Interactive Media and Software Tax Credit, or almost $25,000 per job created. The total amount actually comes close to $2 million, but the state plans on clawing back over half.

Given its relatively high corporate tax rate, long ago the state adopted a strategy of attracting industry by offsetting this with breaks like these. In fiscal year 2016, these reduced corporate income tax liabilities of around $307 million, compared to total potential corporate income tax liabilities of almost $1.55 billion and actual payments of $145 million. The credit in question handed out around $9 million in that year.

This strategy mistakenly substitutes government judgment for market discipline. Bureaucrats choose which applicants seem likely to hit their targets and hope for the best. Unfortunately, as in the case of Gameloft, it doesn’t always work out, to taxpayers’ detriment.

A much better approach would scrap almost all credits combined with lowering marginal rates. This broadening and flattening has greater potential for economic development as it makes investing in Louisiana by any company more palatable and likelier to return a profit. Rather than distorting the market using narrow and imperfect information, this encourages the wider wisdom and information present in the marketplace to make better siting and expansion decisions.

Throughout his two years in office, Edwards has paid some lip service to his idea, but always has sabotaged it by tying tax increases around its neck as he equates tax reform with tax increases. His special session call provides more of the same, as it tries to nudge the Legislature into cutting, if not dispensing with, certain reduced corporate income tax exceptions in effect but scheduled to revert to full strength, coupled with corporate income tax changes that he hopes with increase the total tax revenue taken from company activities.

Raising overall taxes on corporations subverts the idea of attracting them. In a perverse way this actually might decrease the money frittered away by awardee failure to meet certain targets, as fewer companies will wish to come to Louisiana. But it also means fewer would come or expand in the state, period.

As long as the special session produces at worst revenue neutral results in regard to corporate income taxation by lowering marginal rates along with scrapping eligible tax exceptions, that will provide the real tax reform needed. A revenue-neutral outcome would produce organically more future tax revenues without increasing marginal rates than under the current formulation because of the additional economic development this would encourage, through simplification and attractiveness to a wider range of enterprises.

Any other permutation warrants rejection. Economic, not government, growth is what policy-makers should target in terms of fiscal reform during this session.