Automatic tax cuts help LA fiscal restructuring

So, now the latest salvo against right-sizing Louisiana state government comes as a result conditions behind R.S. 47:32.1 perhaps meeting fulfillment, yawps that policy-makers safely should ignore while instead they use the potential situation to their advantage

That statute, which kicked in this year, triggers automatic individual income and corporate franchise tax cuts when the rate of growth in those collections exceeds the rate of growth in personal income for the three calendar years preceding the fiscal year in question, if the prior fiscal year’s taxes, licenses, and fees exceed the FY 2019 baseline by more than that rate of growth in personal income and the Budget Stabilization Fund is at 2.5 percent of the total state revenue receipts.

Calendar years 2021-23 saw an average growth of over 4.9 percent, fueled by the false economy of supercharged Washington Democrat debt spending, although the highest component of that would roll off for the CY 2022-24 calculation. The BSF in May had about $975 million in it and could collect in earnings a little more or with a surplus declaration maybe a lot more before the end of the year. Total taxes, licenses, and fees for FY 2024 were then forecast at $16.124.2 billion, the actual total of which could go higher with a future forecast. These levels are such that state officials think the roughly $400 million forecast in franchise tax and $4.6 billion in individual income taxes could be pared $100-200 million for FY 2025 as the cut would happen on 2026 returns, accomplished by reducing rates much like with local property taxes having rates automatically rolled back if the value of continually-held and not improved property in the aggregate in a parish increased in assessment value.

This would be on top of a predicted $587 million shortfall from the rolling off of the 2018 temporary sales tax and business utilities hikes, effective at the start of FY 2025. That already prompted calls to cancel this from the usual leftist big government advocates, who now have added repealing the law allowing for the possibility of these other rate cuts.

That’s backwards thinking. The presumed deficit came as a result of government growing too fast, at about thrice the rate of inflation, and for no good reason during the governorship of Democrat John Bel Edwards. The law remains a handy tool for restraining the growth of government due to incessant logrolling and a political culture that has valued recycling of state tax collections to local governments.

Indeed, the enforced fiscal discipline can assist further fiscal reform in the state. A long-term goal should be to eliminate both income taxation and the franchise tax while along the way making what’s left more efficient; i.e. flatter meaning few exemptions. Falling rates increase relative flatness the closer they get to zero.

But it also encourages shifting away from an exemption-ridden structure. For example, the corporate income tax is hardly worth collecting, since 70 percent of its proceeds are exempted. Getting rid of the franchise tax – essentially one on business assets that few states have and several have eliminated in recent years – can be ameliorated partially by removing exemptions to this tax.

Which isn’t hard to do from an academic standpoint. Few states have inventory taxed as property, which in Louisiana has parishes assess, then waived and passed on to state taxpayers. The Quality Jobs credit provides little in way of return and the Motion Picture credit even less. Eliminate the pair and property tax applied to inventory and that takes care of the entire gap.

Laugh away, because this trio is among the most sacred of cows for tax exceptions in the state’s whole convoluted system. But that’s the point: if you back supporters into a corner (cut the exceptions because of a deficit, where repealing statute or adding back in a tax is made politically impossible) but give them a sweetener (wipe out the franchise tax) and that can win them over.

This is why any presumed deficit is an opportunity more than a crisis (insert obligatory wei ji reference here), not just for right-sizing Louisiana government but additionally restructuring its fiscal elements to spur economic growth and the increased tax revenues that come from it. As such, responsible policy-making holds the line on both allowing the sales tax hike and utility tax expirations and, if it comes to that, keeping the mechanism to erode individual income and corporate franchise tax rates.