An emerging plan to raise more revenue in a June special session by trimming tax breaks is running into a fundamental problem: Policymakers don’t know the bang the state is getting for giving up its big bucks.
Gov. John Bel Edwards and state Senate President John Alario both said in interviews that they want lawmakers to trim or repeal unproductive tax breaks during a special session that the governor is expected to call in June to prevent painful cuts to government programs such as TOPS, the wildly popular college scholarship program.
But other than with a handful of tax breaks given out by one state agency, state officials have no way to measure the return on investment for each tax break — to Edwards’ frustration.
“It’s an imperfect analogy, and I don’t like to use it, but we talk about running the state like a business,” Edwards said. “What business would spend money and not know what return it is getting? They would want a process in place to measure the effectiveness of that expenditure. There’s only so much capital, and you have competing demands for capital. And you can’t keep spending it on things that are not beneficial.”
Without a way to measure the effectiveness of most tax breaks, Edwards said lawmakers in the special session could cap the amount of money the state pays out for each one.
At the same time, Edwards said, lawmakers could sunset the tax breaks, meaning they would disappear unless reauthorized every four or five years after a legislative review.
He also suggested paring a major tax break for individuals, involving deductions that taxpayers take on their federal tax returns.
During the special session, Alario said, without knowing which ones to single out, the Legislature could simply make sweeping reductions in tax breaks, as lawmakers did in 2015 when they trimmed a number of them by 20 or 28 percent.
House Speaker Taylor Barras, R-New Iberia, expressed less enthusiasm overall for tackling tax exemptions — reflecting the anti-tax mood in the more conservative House.
“We would want to determine we have scrubbed all of those [government] departments before we touch taxes,” Barras said in an interview.
Many other lawmakers, however, are increasingly focusing on reining in tax breaks as a solution to the state’s budget woes as they realize how much money they are giving away.
During the February/March special session, they created the Task Force on Structural Changes in Budget and Tax Policy and asked it to issue a report on Sept. 1. The 13-member group has been discussing policy ideas weekly but will now accelerate its work because Edwards has asked for an interim report to help guide legislators during the June special session.
Tax breaks are expected to cost the state $7.7 billion next year, up from $7 billion five years ago, thanks to dozens of tax exemptions, exclusions, credits and rebates awarded by the Legislature over the years. While giving up $7.7 billion next year, the state is expected to collect slightly less, nearly $7.5 billion.
To get a better handle on the situation, the Senate Revenue and Fiscal Affairs Committee has been methodically reviewing tax breaks at its meetings every Monday afternoon. Typically, a lobbyist appears before the committee to warn that eliminating the tax break or making it less generous would lead to job layoffs.
In most cases, the lawmakers don’t have information available to ascertain the validity of the lobbyists’ claims. Apparently, however, hearing the same argument over and over again is dulling its impact.
“The degree of skepticism on the committee [about tax breaks] is tremendous now,” state Sen. JP Morrell, D-New Orleans, the committee chairman, said in an interview. “We always hear a rosy story from the lobbyists.”
Morrell has settled on one solution. “I would sunset everything so industries have to show up and defend their tax breaks,” he said.
Edwards noted that some tax breaks cost much more than the original estimate.
For example, the Legislative Fiscal Office was unable to estimate the cost of a tax break approved by lawmakers in 2009 that reduce the taxes owed from the sale of a Louisiana business. So the fiscal office put the cost at zero. The Senate Revenue and Fiscal Affairs Committee learned on Monday that the tax deduction is projected to cost $53 million next year. About 95 percent of the benefits go to the 17 percent of taxpayers with the highest incomes, according to the Revenue Department.
Fueling the desire for action is the state budget deficit, now an estimated $600 million for the fiscal year that begins on July 1. The deficit means lawmakers have to make about $600 million in cuts to safety-net hospitals, colleges and universities and other programs or raise that much in revenue during the special session, or adopt some combination of cuts and tax increases.
Lawmakers also have taken notice of the generous tax breaks for businesses.
As The Advocate reported last week, the treasury paid out $152 million more to corporations than it had collected in corporate income and franchise taxes through March, although tax collectors expect to end the current fiscal year on June 30 in the black.
“I think the people would expect us, before we put any more taxes on their back, to ask those who have been enjoying all these special interest exemptions to pay up a little something,” Alario said. “Whether it’s a fair haircut across the board or we zero in on a particular place, I think we certainly ought to take a look at it.”
In the meantime, state Rep. Julie Stokes, R-Kenner, is continuing her study of the state sales tax system and is planning to offer recommendations on which of the 192 tax exemptions and exclusions ought to be axed.
But what is the state’s return on investment for the giveaways?
“We have little information on that,” said Steven Sheffrin, an economist at Tulane who heads its Murphy Institute.
Louisiana Economic Development, which recruits companies to invest in the state, keeps a rough measure of the jobs and investment that result from several tax breaks: for investing in Enterprise Zones, for hiring “Quality Jobs,” for research and development costs, for investing in Digital Interactive Media and the Industrial Tax Equalization Program, which awards tax breaks to companies that might otherwise move to another state.
Along with whacking dozens of smaller tax breaks in the special session, the Legislature might examine whether to no longer allow taxpayers to take a full deduction on their state income tax returns from their federal excess itemized deductions. Edwards said the deduction could be trimmed to 57.5 percent, which he said would still allow most taxpayers to claim a full deduction on their mortgage interest payments and charitable contributions.
Alario, however, said he didn’t have much appetite for changing the state’s income tax system.
Jim Richardson, an LSU economist who co-chairs the 13-member task force, suggested an alternative to having the Legislature try to pick winners and losers by singling out which tax breaks to eliminate.
“You could get rid of a lot of them and then lower tax rates,” he said.
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