Good tax reform plan has small margin for error

For his tax reform by cutting a thousand things to pass into being, Republican Gov. Jeff Landry must avoid its death by a thousand cuts.

Months ago, Landry began stumping for large-scale tax reform to ensconce a more rationale and efficient fiscal structure in Louisiana that will encourage economic growth. The current system’s complexity, favoritism to certain entities, and inflexibility that encourages outsized government has for decades dampened economic development prospects.

Apparently satisfied he has something effective that can become law or part of the Constitution, he has signaled early next month he will call the Legislature into special session for a couple of weeks or so, which means he must issue the call this week. His Department of Revenue with an assist from the Legislative Fiscal Office has produced eight pieces of model legislation and fiscal analyses of each, totaling 385 pages of changes that forecasts overall state government revenues won’t change materially but likely positively in the short term.

An independent analysis from a consortium of three government accountability interest groups styling themselves Reset Louisiana produced a positive conclusion from a review of sales and income tax changes insofar as state finances were affected. It reports that the income tax becomes modestly more progressive, and the sales tax becomes slightly less regressive as a result of the proposed changes, and in considering the changes to income and sales taxes the vast majority of Louisiana citizens will see a significant tax cut. Of those that do not – at the very lowest end of income and certain high gross income filers with large amounts of deductions – those at lowest income end would expect to pay less than $30 more a year. Nonresidents may see significantly higher total taxes.

That bodes well for the package’s success, but the bar is high that could give outnumbered opponents enough leverage to deny that. Most, if not all, of the legislation necessary will require two-thirds supermajorities in the Legislature because constitutional changes or elimination of tax exemptions are scattered throughout, with at least one bill as well needing ratification by the public as a constitutional amendment.

Given the interconnectedness of these, substantial change in any bill or its defeat basically brings down the whole package. And, given little if any expected support from Democrats, Landry can afford almost no GOP legislator defections to win the day.

Three distinct interests will try to put the squeeze on to pick off a few Republicans. One is the political left, who sees the reforms’ potential to right-size government and reduce dependency on government that it prefers. They will try to make the specious argument that a few of the poor won’t pay less in taxes and of those that do higher earners will receive a bigger break. With almost all in absolute terms paying less and the very few who aren’t either being wealthier or hardly paying, hopefully conservative legislators won’t fall for such a weak class warfare argument.

More threateningly, businesses mainly in the service industry might try to scuttle one or two bills dealing with expansion of sales taxes. The overall plan, exchanging lower income tax bills practically for every filer for making a permanent the 2018 sales tax increase and expanding designated services that must collect sales taxes from eight to 49, will draw concern from those that purvey the 41 new taxed services who could pressure lawmakers to exempt them.

Yet perhaps the biggest threat comes from parishes and municipalities and perhaps other local taxing authorities, who will see their abilities to tax sales of prescription drugs and manufacturing machinery equipment disappear and must be convinced broadening the base won’t materially affect their revenues. A particular subset, those that have the state offset a large amount of inventory taxes paid by filers within their border – inventories comprise at least a quarter of property assessments in over a half-dozen parishes – will be hesitant to support putting into law a deal that could lead to the end of that subsidy, which would discourage economic investment, in exchange for a one-time large bonus payment. Just a handful of the highest-subsidized parishes – in some places, a single businesses thus its local governments can reap millions of dollars from this tax credit – could convince their local delegations to excise that part thus derailing everything.

So far, the Landry Administration has done an excellent job of publicizing the changes and making the case for them. But its margin for error is small. To keep the heat off any legislator prone to support this reform from succumbing to opposing even a small part, whether it succeeds in this will depend on how well it rebuts these arguments against and it reassures the change will have a net positive impact in the long run.