Tax & spend natl policy subverts LA budgeting
Recently the Baton Rouge Advocate printed a piece trying to understand why a series of Louisiana operating budgets seem unable to close permanently a deficit. Unfortunately, the effort missed opportunities to provide a comprehensive explanation and thereby presents somewhat of an incomplete, if not misleading, picture of reality.
The article attempted to divine why, as its headline proclaimed for an answer, “Revenue fell faster than budget shrank.” But it comes up short in understanding both sides of that equation, beginning with alleging that “the supply-side economic policies that Jindal said would make the state’s coffers run over haven’t done so.”
Many misunderstand, if not intentionally try to caricature to try to prop up weaker worldviews, Austrian economic theory, from which the supply-side argument is derived. First, “supply-side” does not mean that all tax cuts generate increased revenue, but that past a certain taxation level, particularly on income rather than consumption, any increases become counterproductive, in that the confiscation of wealth from individuals disallows its use for investment to the point that tax revenues decrease because of too little economic development. Thus, only cuts that remove government from this prohibitive zone will cause increased revenue.
Second, the effects of a change in marginal tax rates are for the most part long-term in nature, of lengths neither uniform nor determinate. The lower the rate of savings/investment by individuals, the quicker the impact but the lesser the long term impact. Regardless, the multiplier effects involved mean more of the impact occurs in the future rather than the present. Typically, it takes several years before a chain of investment decisions in the private sector pays off, and only then does the additional revenue show up in government coffers.
Third, the function describing this tradeoff of rates and revenues, colloquially called after its chief expostulate the “Laffer Curve,” is ever-changing, for the preferences of individuals change of relative advantages of work vs. leisure, consumption vs. savings, etc., as well as their responses to a myriad of other government policies, with these over time changing as well. Thus, while at one point in time a marginal tax rate may not be on the prohibitive side of the curve, in the future with no change in tax policy it may end up on it, and vice versa.
Finally, the larger context of the reason for setting a rate at a particular level often gets lost in the shuffle. There is an inherent good in maximizing human freedom by reducing confiscation of their property, but this is balanced by desires to produce collective goods and by a notion of fairness that individuals should be compelled to sacrifice to assist others with genuine need forced by circumstances beyond their control. Therefore, forcing rates as low as possible is not an end to itself, but setting rates at the lowest possible level is the succeeding step dependent upon a carefully-considered assessment of what government should do to provide collective goods and equity, given the imperative that maximizing individual liberty is the primary, but not exclusive, goal of tax policy.
So the article oversimplifies, if not distorts, the role of tax-cutting in subsequent revenue generation. Reductions actually began the year before Jindal got into office, and there was a small increase a couple of years ago, but including them all, it’s unsure whether by these net cuts a move was made from the prohibitive side of the curve or how far along it, and if so their impact for some even seven years on may not have been felt yet or in its entirety, and the curve itself may have shifted to muddy the waters further.
The article does catch on to the idea that tax policy must conform to a consensus concerning what spending that forms in society, in that it asserts that spending did not come down enough. But it whiffed in explaining that chronic deficit emergence in Louisiana come not from not enough revenue being collected, but that too much is being spent. Even after all the recent reductions, where from fiscal years 2008 through 2014, Louisiana ranks 22nd among the states and District of Columbia in per capita overall spending (2013 data). (Keep in mind that the year before Gov. Bobby Jindal took office, the state ranked 10th.)And it’s not because of federal spending, which largely is a function of a state’s relative poverty, where Louisiana ranks high, and to a lesser extent military infrastructure, where Louisiana is above the norm, where it ranks only 26th (2013 data).
Indeed, the almost chronic deficits comes not because the state doesn’t have enough revenue, but because it spends beyond what it should for one at its level of per capita income (29th). That it has a spending problem is a failure of will on the expenditure side, not because tax cutting has been too aggressive.
At least the piece does try to hedge on its conclusion that a “drop in revenue” occurred mainly because of the (taking effect in) 2009 reduction in marginal rates and increase in deductibility, by averring that “those legislative changes took place against the backdrop of a national recession, and that was a factor in Louisiana’s revenue slump,” but then abruptly dismisses the idea and explores it no further. In fact, it’s relatively easy to compare the two different economies, keeping in mind that the national economic downturn began about the time Jindal took office and the year after Pres. Barack Obama took office and immediately and dramatically increased spending, followed four years later by substantial tax increases mostly on higher earners.
In that 2009 to 2013 period, Louisiana’s state-generated revenues increased 10 percent while the federal government’s went up 32 percent (2008 is not included because effects of disaster relief money still were prominent in the state’s budget; that total is higher than the 2013 figure). But in terms of per capita gross domestic product (including 2008 data), the state’s increased over 9 percent while the country’s was up only around 7 percent. In per capita income (data through 2012), the state lagged about a percentage point in increase, although in median family income it led the nation’s by about a percentage point (the latter of which hardly changed from 2009 to 2013). Finally, in jobs Louisiana eked out around 1 percent employment growth (through 2013) while the country as a whole lost about 3 million jobs or over 2 percent.
In other words, the Louisiana economy did no worse, if not better, than the U.S. economy during the period tax cutting began in the state, even as higher revenue collection increased less than a third of the federal rate. That should be no surprise, for when the state’s economy represents only 1.2 percent of the entire country’s obviously the latter drives the former to a large extent. To translate that to revenue collection, two things are at work here: Louisiana’s economy has had to fight off the headwinds of national economic policy which in many ways has been doing the reverse of the state’s that has produced anemic economic growth and thus retarding the potential for Louisiana’s policy to induce growth, and the state’s fiscal structure inefficiently translates improving economic performance into revenues.
Pertaining to the latter aspect, a favorite whipping boy to explain that has been the growth of tax exemptions, and the piece points out that corporate income tax break amounts have doubled during the Jindal years. But it misses the fact that, in the aggregate, these have not changed that much from 2008, going from $7.2 billion to $7.6 billion, increasing from 47.5 percent of all potential revenue collected to 51.5 percent. That provides a partial explanation, but is not the total picture. Another conjecture is that the 2009 reductions that pushed all but the lowest-paying or non-paying filers into lower brackets in essence sapped the state of revenue while pushing increased proportionate burdens onto those in that lowest bracket.
As it is, the tax cuts have hardly changed the distributions of who pays how much individual income taxes. In 2008, those filers of $25,000 or fewer in the federal adjusted gross income range comprised 44.3 percent of all who paid 3.8 percent of all taxes with an average payment of $125.81, those between that and $100,000 were 43.9 percent paying 38.4 percent with an average bill of $369.73, and those above that were 11.8 percent paying 57.6 percent with an average tab of $7,139. In 2013, the lowest group (which is extrapolated because the cutpoint changed from $25,000 to $30,000, with a uniform distribution for the numbers of filers but a curvilinear function for tax payments, meaning that proportion paid and the average figure for this group will be overestimated) made up 39.1 percent and paid 4.8 percent with an average of $128.37, the middle category was 49.3 percent and paid 37.9 percent (because of the change in cutpoints, the proportion of all payments for this group will be underestimated and the average can’t be computed), and the highest category was 11.6 percent paying 55.1 percent for an average of $6,182.
These data show the assertions of some, such as made by the leftist Louisiana Budget Project that wealthiest taxpayers have seen their income tax burdened lightened at the expense of the middle and lower classes, are entirely false. In reality, the breaks did slightly lower for that one-ninth of the population that pays sixth-elevenths of all income taxes their proportionate burden and more significantly their liability, but it appears (accounting for the different data metrics) the other two brackets hardly paid any differently with similar burdens. This makes sense; tax cuts hardly affect those who don’t pay relatively much in taxes (if they do at all) while they do significantly affect in a downward direction the absolute amounts of those who pay a far higher disproportionate burden.
Which leads back to the question posed in the article, about why there is a shortfall if the most productive users of capital are allowed to keep more of what they earn. Yes, while the shortfall did come about because state spending, tied into revenues because of the balanced operating budget constitutional imperative, did not get reduced as much as revenues have fallen, the reason was not because lowering marginal income tax rates, as a way of shifting tax burdens away from the major beneficiaries of the lower rates, thereby preordained this outcome. Rather, because the large part of Louisiana’s economy is affected by policy made at the national level, and those policies of increasing spending and taxes have acted in an opposite and economically depressive fashion to those of the state’s, the desirable impact of tax cutting in the state has been blunted by national policies that have caused an exceptionally poor and drawn out recovery nationally, unnecessarily lengthening the time over which freed capital in the state can turn into increased tax take by its government even as relative changes in income and employment figures shows Louisiana’s recovery is as good, if not better, than the country’s as a whole. Were national policy more like Louisiana’s, its economy would be functioning even better with increased tax revenues to show for it, and this shortfall may not exist.
Yet state policy of a different kind also is to blame. Aggravating the situation has been an inefficient state fiscal structure that translates poorly greater wealth in the population into tax revenues, with one example of this being the inventory tax credit that allows local governments to set tax policy for the state without the state having any input into it. Also making matters marginally worse is the insistence of spending more than the state’s underlying wealth would recommend, given per capita spending numbers, reinforcing the truism that historically Louisiana’s main problem has been a spending, not revenue, problem.
Thus, to create a more stable budgetary situation, Louisiana needs to hold the line on marginal rates but to eliminate tax breaks that are bizarrely unproductive that makes for a fiscal system inefficient at translating economic development into tax take, such as the motion picture investor and earned income tax credits. Further, it needs to reduce spending by reshaping or ending low priority and/or ineffective programs, such as by instituting a family cap on cash assistance programs, and wringing inefficiency out of others, such as by paring and reforming a bloated higher education system. But most of what can aid here is out of the state’s hands, resting upon a change in Washington from a philosophy that government can tax and spend its way to prosperity to one that lets people keep more of what they earn and scales back dependency-enabling policies that have served to depress incomes and promote joblessness.
The data do not demonstrate that the inherent and inevitable outcome to cutting marginal income tax rates has put Louisiana into budgetary difficulty, and any implication to the contrary ignores the facts.
Posted by Jeff Sadow at 10:35