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24.5.23

Combo bills increase tax-cutting leverage

An alliance between those that don’t want to see smaller government in Louisiana and who understand the little use the state’s Quality Jobs Program has might form over Republican state Sen. Bret Allain’s SB 1 and SB 6.

His two bills rest a just a step short of legislative completion, now ready for the House floor. SB 1 would phase out the corporate franchise tax, which few states have and, because it taxes the total worth of a corporation it depresses investment and can cause cash flow problems, if not failure, when businesses don’t turn a profit. Of those states with one, Louisiana’s is the most punitive as it has the highest rate without a cap. The bill lops off a quarter of the tax over six calendar years starting in 2025 annually when the Revenue Stabilization Trust Fund has an inflow in the associated fiscal year, which occurs when corporate income and franchise taxes together exceed $600 million annually.

Present law formulaically reduces the rate whenever the amount is exceeded. At last week’s Revenue Estimating Conference meeting, economists described as likely under current law the franchise tax rate would decline significantly if current forecasts manifest into reality. Given that testimony, SB 1 should also trigger a reduction, although it’s uncertain whether that would be as much, but trends suggest it would eliminate the whole thing by the 2031 end and perhaps as early as 2029.

That means a nearly billion-dollar reduction in revenues through 2028. But the bill is paired with SB 6 that would halve a quality jobs tax credit reduction relative to the franchise tax rate every time the latter falls by a quarter, or an eighth to the rebate rates. If and when the latter disappears, the former will end up half of its current level, with each of the latter’s three components adjusted separately: a 4 to 6 percent rebate depending upon firm size, job pay (above $18 per hour), location, industry, and out-of-state sales on at least 5 to 15 new jobs’ payroll; a state sales tax rebate for construction materials related to such jobs’ creation (and eligible for similar local tax relief upon local governments’ assent); and, if not taking the sales tax rebate, instead a 1.5 percent rebate on the cost of capital expenditures related to the created jobs.

Any cutback in QJB rebates is desirable, for the credit rivals that of the Motion Picture Investors tax credit for most wasteful in the state, according to the numbers. A 2020 analysis of it revealed some sloppiness in verifying job creation, but mainly that the credit paid out according to overestimates of creation more than double actual numbers, many parishes accrue few or no jobs through it even as they have lower average wages and higher unemployment, that most jobs created would have come about without program intervention, costs far exceeded net return to the state, and even if the program helped boost household incomes the overwhelming majority of that would have come without the program’s intervention.

While the current version of SB 1 would reduce state revenues just shy of a billion dollars through fiscal year 2028, the current version of SB 6 eventually would mitigate a fifth of that (so a tenuous forecast predicts), or a savings of about $200 million over that span. Mathematically, if the franchise tax disappeared, half of the QJP rebate would disappear, meaning that using FY 2022 numbers the state would save $90 million annually, but with revenue of $329 million in franchise taxes forgone.

Big spenders won’t like that number, but consider the alternative. Should the House version of the operating budget HB1 that doesn’t bust the state’s spending cap prevail, with excess dollars floating about it would leave the Budget Stabilization Fund would be filled to where it triggers automatic franchise tax and individual income tax cuts. The latter won’t look to be substantial, but the former will be, to the point in a couple of years it likely will be wiped off the books completely. That means, without the SB 1/6 combination in effect, the entire $329 million in revenue will disappear, and sooner, instead of eventually settling at $239 million fewer.

This gives fiscally conservative legislators another tool to keep the cap in place. They could offer to trade out the franchise tax reductions currently in statute for SB1/6 and keeping the cap in place, by first passing HB 1 adhering to it to send that product to the guy whose colon will tighten by all of this, Democrat Gov. John Bel Edwards, then pass along to him SB 1/6. Senate leadership, who with Edwards have wanted to breach the cap, should take such a deal instead of risking House resistance to pushing higher the cap. As only a third of its membership can stop that, they could halt any progress and leave the fiscal profligates with nothing at session’s end.

While this overcomes Senate big-spenders, there still is Edwards. But this year right-sizing legislators have an extra tool in their arsenal to force him, as well as other legislative profligates, to capitulate. In election years, any special session dealing with appropriations except for legislative expenses requires a three-quarters majority to pass. The concessions they could extract dramatically increase with this kind of leverage, so Edwards won’t want to have it come to that.

Thus, fiscal conservatives who realize the uselessness of the QJP and big spenders frightened at the leverage the former can exercise may come together to get rid of that – and the franchise tax over time – and thusly make progress towards right-sizing state government. Considering Louisiana’s neighbor to the north is lapping it this year in positive policy developments, a modest victory like this would be most welcome.

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