Tax reform paying off more quickly than thought

 With apologies for stealing and changing this line: OK, Landry, Nelson, Emerson, et. al. were right.

Last week, Louisiana’s Revenue Estimating Conference held its end-of-calendar-year meeting to revise numbers. These revisions can mean the state might have extra money from past budget years to spend on essentially one-time items, extra money for this budget year to spend on anything, and more to spend on the upcoming fiscal year 2027 budget – or it might be reversals in this year where forecasts could cause retrenchments and reduced future expenditures, respectively.

With almost a year of data from changes made during last year’s Third Extraordinary Session of the Legislature now on the books, many of the usual suspects from the collectivist political left then predicted at best “uncertainty,” at worst “budget shortfalls” as a result of flattening tax individual and corporate tax rates, broadening the base a little by excising some exemptions, increasing individual exemption levels, and increasing the sales tax rate. Howls of protest came about how this would prove to be regressive and hurt lowest-income people’s pocketbooks (although one analysis estimated it would cost a whopping $5 extra a year for such a household).

And, as usual, they were wrong. Instead, budget surpluses have emerged (joining a surplus declared at the last meeting a forecast was adopted, the mid-year/near-end-of-legislative-session). Now, with new forecasts approved, there is an extra $293 million for this fiscal year, and next year $217 million, instead of balanced and a predicted $131 million deficit, respectively.

As always, cautionary notes were included. If constitutional amendments pass this spring, the resulting abolishment of trust funds would cost $68 million in interest. Also, employment gains were expected to level off near record highs, but this is a consequence of policies enacted under Democrat former Gov. John Bel Edwards that caused residents to flee the state, where the population despite recent gains since Republican Gov. Jeff Landry took office has fallen by around 50,000 people since the pandemic.

Reviewing the essential shift of less income taxation and more sales taxation, the proportion shifted roughly 10 percent from income to sales, but income taxation in all of individual, corporate, and corporate franchise (which goes away next year) still comprise over half of revenues with remainder from other sources, mainly from mineral revenues. And even at these levels, wealthier taxpayers pay far more than all others.

Looking ahead, total corporate income tax collections likely will dip for a year or so but then breach past the baseline. By contrast, individual collections were starkly higher despite lower withholdings, although this probably will take a hit with refunds in the spring after returns are filed. Sales tax collections, which are much more elastic to recent changes, were slightly higher than the bump incorporated this spring.

The only surprise here is how quickly income tax collections have rebounded, which with the cuts creates a naturally higher baseline because lower taxes on productivity, as opposed to being on consumption, boost economic development, with the increased baseline emerging sooner. This came because of a slowly improving national economy previously addled by the Democrat former Pres. Joe Biden era.

Naturally, the national economy will have the greatest impact on state revenue collections, but state policy matters, as evidenced by the first term of Edwards, when the national economy grew substantially during the first term of Republican Pres. Donald Trump yet on almost all indicators Louisiana lagged. Plus, a number of large corporate expansions, such as the Hyperion project, spurred by the tax structure evolving into one spurring development, will put more wind into the sails somewhat independently of national trends.

Simply, the decision by Landry to commit to the tax swap, with the nuts-and-bolts supplied by outgoing Revenue Secretary Richard Nelson, and leadership by GOP state Rep. Julie Emerson and others to pass the measures, paid off. Fortunately, they didn’t listen to leftist doomsayers who see bigger government as the main desirable output of tax policy.