Political courage needed to fix irrational tax structure

Part of the reason why Louisiana’s fiscal situation has gotten to this point of relative revenue penury is incoherent taxation policy between state and local governments. There are ways to improve that, but you wouldn’t know that listening to some policy-makers.

As things stand, what to do with the inventory tax rebate promises to generate the most discussion at the Legislature’s regular session starting next week. The Gov. Bobby Jindal Administration has made this the revenue-generating centerpiece of its proposed budget. Local governments may levy the tax but for nearly a quarter century the state has rebated that back to businesses, after first covering corporate income and franchise tax liability.

In essence, this means that parishes with a high concentration of industries in manufacturing and vehicle retail have the impunity to raise property taxes all they want because state taxpayers cover it, allowing them to keep bigger government as they already charge above-average property and sales tax rates. Thus, state taxpayers subsidize spending by local government. So it’s no accident that politicians in these parishes, both those of parish governments and their subgovernments and of school districts with coterminous boundaries, express opposition to ending the rebate or, worse to them, ending the ability for local governments, as is the case in most states, to impose inventory taxation at all.

Which makes them cowards and rent-seekers. School superintendents of St. Charles, St. James, and St. John the Baptist Parishes’ systems recently lamented the potential fiscal impact of these changes to their privileged positions. Remaining unsaid was that the state subsidization left St. Charles ranked third in the state in inventory taxes collected only behind parishes about eight times larger in population, St. James (one-twentieth the size of East Baton Rouge or Jefferson) ranked sixth (behind two other parishes several times its population), and St. John the Baptist (one-tenth) ranked seventh.

In other words, removal of this revenue stream coming almost entirely from outside the jurisdictions in question means these authorities can tax almost with impunity to support outsized government, and to remove it would force hard choices on them that, as political figures, they would do anything to avoid as by doing these they or the bodies that appoint them would create negative feelings about them among voters. They do have an excuse for being allowed to spend other people’s money: the state, particularly on large construction projects, sometimes swoops in and exempts property taxation for resulting sites for years to come as an incentive to get firms to locate such facilities in the state, without local governments having any input into the decision.

That’s asinine, but does not excuse local politicians’ culpability. The average amount of assessed value that taxing authorities in Louisiana parishes extract taxes from is about 15 percent, with the three parishes in question here right around that average. It’s bad policy to impose unilaterally exemptions like this onto the areas affected by them, but in the final analysis it doesn’t really affect adversely the taxable base in their cases, perhaps because the sales tax revenues from the influx of jobholders and property taxes collected from their dwellings compensate. And the exemptions do eventually expire.

As previously noted, the solution to shear away these messy, counterproductive incentives is not complicated: eliminate the inventory tax and reduce the homestead exemption. This makes local governments and those they tax, not state taxpayers, responsible for local taxing and spending policy, with the paring of the nation’s highest exemption leading to a broader tax base that not only would mean potentially no increase in property taxes for most local governments, but a decrease that could be rolled back no later than next year. For a few places such as the three parishes mentioned, this probably would not make up for lost revenues, but they have no right to charge taxpayers outside of their parishes to provide for their services, and they will have to start earning their salaries by making choices in which to cut.

Yet, while several pieces of prefiled legislation addressed the riddance of the inventory tax, with state Sen. Robert Adley’s SB 85 the best of the bunch, none surfaced in the Legislature to lower the homestead exemption. In fact, the only one really to address it, HB 59 by state Rep. Bryan Adams, unbelievably actually wants to increase it, an entirely counterproductive policy beholden to the populist curse that has caused this problem of incoherency in the first place.

For, as by populism, it’s all about making people think somebody else pays for their things, as a higher homestead exemption does by passing on property taxes to business, which then increases the prices of its goods bought by those enjoying the exemption hike. The same applies with the inventory tax rebate by spreading out the costs across the state so that a few may become large net beneficiaries with most becoming smaller net payers. And simply getting rid of the refund, while better than having it, fails in that the resulting next tax increase to some businesses – which because of it admittedly get disproportionately beneficial treatment compared to businesses with low to no inventory – will get passed along to consumers. Getting rid of it entirely would mean that local governments would have to take more responsibility for their policy decisions and the connection between those and tax policy would be more easily discerned by local taxpayers without the indirect mechanism interposing – and would create more efficiency because that intermediary would disappear – creating better accountability in government as well.

But if as a result of these changes this thrusts onto local governments the necessity to choose, the state also needs to free them to choose more wisely. This means changing state Constitution to give local governments input into state-level decisions to exempt property taxes for a period. For example, the state only could have authority to exempt half of those taxes, with the option for any of the remainder left to the local governments in question in proportion to their percentage of the overall millage charged, with state Rep. Julie Stokes’ HB 362 a good jumping-off point to achieve this.

By putting these changes into the Constitution, some degree of rationality that demarcates clear lines of responsibility and increased accountability in government would make for more efficient governance that results in revenues that better match the productivity of Louisiana’s economy, eliminate off-loading costs from one parish’s citizens to others’, and provide greater incentive to right-size local governments. The only thing that would prevent these changes from moving forward after the session to the people for discussion and disposition is a lack of political courage among Louisiana’s legislators.