Move now to fix LA fiscal policy, next budget

With a constitutional convention apparently off the table for the immediate future, Republican Gov. Jeff Landry appointee Department of Revenue Sec. Richard Nelson has a difficult task to lead in steering state fiscal policy away from deficit shoals.

The convention would have proposed transferring some revenue and spending imperatives out of the Constitution so that the Legislature in 2025 would have had more flexibility in dealing with the disappearance of a temporary 0.45 percent sales tax first imposed in 2016, as well as a 2 percent tax on business utilities purchases for fiscal year 2025. Only the political far left – ironically as it alleges to support lower income households yet sales taxes disproportionately hit those individuals – is advocating keeping the sales tax.

The sales tax generates about $455 million annually, the utilities tax generates about $211 million, and the estimated state budget shortfall without this revenue is $558 million for FY 2025. Landry and Nelson now hope to have a special session of the Legislature meet late this or early next year to tackle the expiration, after legislator fatigue of two special and a longer regular session this year that turned sentiment against a special session acting as a convention this summer.

While straitjacketing of measures in the Constitution that require two-thirds of each legislative chamber and then a majority popular vote presents a procedural problem, the political problem in place is a wildly inefficient tax regime that keeps marginal rates higher than necessary because the sales tax code alone is riddled with 223 exemptions. With all tax sources having exempt three-eighths of all possible revenue collected, this distorts economic development in the direction of favored constituencies regardless of whether their activities provide maximal economic development gains, which in turn suppresses revenue intake by government.

Economically speaking, the most efficient tax regimes rely upon the fewest exemptions and the lowest and flattest rates as possible. Unfortunately, the least-productive exemption, the individual exemption on unprepared food, medicine, and utilities, remains imprisoned in the Constitution that could have been moved to statute in a convention, then modified. Eliminating that which alone costs $1.25 billion could reduce the state sales tax rate by a sixth on top of the expiry and cover the projected deficit from the tax roll-offs.

Instead, Nelson, who in just a term as a state representative built a reputation as tax policy expert, is looking at excising many other sales tax exemptions. Since each has a core constituency that often can convince a few key lawmakers, if not as patrons, to preserve its break, the best strategy would be to put all in a package that cannot be amended to force an up-or-down vote on all together or else face a deficit.

Nelson also has pledged to take a look at the convoluted inventory tax exemption from local property taxes. Few states have an inventory tax, and Louisiana goes further by making largely whole that tax paid out to local governments, where the distribution of businesses favor demonstrably governments located in certain parishes over others. It simply should jettison that tax, which will save $285 million, and give when necessary local governments the tools to adjust their taxing powers to compensate. Similarly, a few parishes reap huge bounties from state reimbursements for taxation of vessels and offshore holdings that could be wiped off the books.

Connected to that, Nelson also says he’ll review the notion of the corporate franchise tax, or a tax on assets about a third of states have, but that would cost $400 million. With about $2 billion available in sales tax exemptions without the one on food, drugs, and utilities, getting rid of the inventory tax exemptions and franchise tax plus the roll-offs and not going into deficit (assuming no change in spending) would mean slicing total sales tax exemption dollars by a third.

However, another logical place to pick up revenue would be from eliminating the Supplemental Nutrition Assistance Program and Women, Infants, and Children sales tax break. Research shows this carries no real benefit for recipients where more benefits would be accrued for this group by lowering marginal rates. This would make $100 million available.

Broadening the range of goods taxed, such as adding digital, and including more services are options, but these only should be parts of revenue swaps, or exchanging this new taxation for income tax marginal rate cuts and/or deduction increases. For now, a balancing act among sales, inventory, and franchise can serve to ameliorate the roll-offs.

It has to be done holistically, not only because of the complexity and consequences reaching across revenue classes but also to reduce logrolling among legislators that in the past has protected exemptions, and understandably so for legislators to commit in a special session for changes. Landry, Nelson, and other reform advocates need to get to work straight away.