Last week, the Revenue Estimating Conference put the official fiscal year 2019 surplus at $535 million, joining surpluses over the previous two years that make these the highest in state history over such a time span. Even though the 2018 renewal of 2016 sales tax increases backed by Democrat Gov. John Bel Edwards took in almost as much, economists attributed the gigantic overbite primarily to federal income tax law changes. Keep in mind the surplus came even as Edwards has ratcheted up spending of state tax revenues on operating costs faster than the rate of inflation during his time in office.
Of course, big spenders like Edwards, his Commissioner of Administration Jay Dardenne, and certain legislators have come up with dishonest rationalizations not to implement tax relief despite the record results:
If policy-makers want to address these kinds of issues, they need to have an honest debate about this. They claimed the state needed higher taxes to address a “deficit” in operating outlays, which proved false. If they want to justify continue higher taxation to manage capital outlays, shore up pensions, and fill the rainy day fund, they need to plan tax collection around that, instead of these things happening accidentally as a result of a bait-and-switch, as well as address cost controls for runaway Medicaid expenditures.
Now add to these rationalizations, offered by Democrat state Sen. J.P. Morrell in the wake of the REC’s surplus ratification, that tax exemptions could run wild and eat any surplus away. But reviewing the data on tax exemptions (FY 2018 being the latest) shows this to be largely an illusory threat.
Consider that sales and property tax (relevant because even though the state doesn’t levy one local government ones the state may cover through its inventory tax credit, the tenth highest in amount of all exemptions) revenue levels seldom fluctuate much, and that in many cases the state must approve of local hikes in the rates of these (if they have hit their legal ceilings). Thus, it would take quite a while for a series of yearly increases to start decimating the budget.
Only income tax receipts, and thus to a lesser degree exemptions tied to these, can escalate rapidly. Of course, quickly advancing income tax receipts also create a surplus, so it would have to be an unusual situation for the exemptions to increase at a far faster rate than total intake.
Further, for individuals four of the largest income tax exemptions tie into federal income taxes, of which no great changes appear on the horizon that would cause a spike in these. Two others address retirement payouts, which are highly unlikely to change materially. And for corporations, one of the largest ties to federal income taxes, others into enterprise zones and jobs credits that likewise seem very unlikely to move significantly higher over the next several years, and perhaps the most volatile, the Motion Picture Investors Tax Credit, is capped.
Even if a bogus rationale, bringing tax exemptions into the discussion does lead to a useful policy prescription. If income tax changes at the federal level triggered the surplus, then bring income tax relief while paring exemptions.
In FY 18, corporate income and franchise tax collections totaled $507 million, but created $1.368 billion in exemptions. Just wipe out both; the budget remains balanced and economic activity ought to get a boost by relieving companies of having to commit to all the bureaucracy in chasing exemptions that distorts their activities in the direction of the exemptions, diverting their efforts from the most productive uses of their capital.
Some may lose under this arrangement, such as a very few firms with high inventory taxes (as their local property taxes which they then would have to pay may outstrip disappearance of their state income and franchise tax burdens) or filmmakers (who enjoy a refundable credit), but on the whole the state wins. The burst of economic activity will help individuals by lowering prices, providing more jobs, and raising wages.
Record surpluses caused by over-taxation demand meaningful tax reform to put things back in balance. Eliminating corporate income and franchise taxation in Louisiana accomplishes that.