Louisiana’s system of taxes and budget desperately needs some short-term tourniquets to stem the gaping wound of a $1.6 billion deficit — but the system also needs long-term reforms, and the effort ought to start this year.
A large part of Louisiana’s long-term budget problem, which will require another whole column to discuss, involves the state’s practice of so tightly dedicating certain revenue sources to specific spending priorities that there’s far too little flexibility to move funds around to ward off legitimate shortfalls in any one area. A certain amount of flexibility allows for greater efficiency and, thus, for savings at the margins.
Likewise on the revenue side, the problem is as much one of design as of size. Some taxes are more efficient than others — they cost taxpayers less time and money to comply — while some help make the state less competitive (against neighboring states) than others do, and some wisely spread the costs more evenly among various income groups.
On the latter point, I’m already on record opining that even if taxes should not be significantly progressive — in other words, they should not fall inordinately heavily on the wealthy — they certainly should not be so regressive that the working poor actually pay the largest portion of their incomes to state and local governments.
It’s not necessarily easy to design, much less redesign, a tax system that is simultaneously fair, competitive and efficient. But Louisiana’s system is so out of whack that a redesign is necessary.
The best summation of the problem comes from Scott Drenkard, a policy expert from a respected national group called the Tax Foundation.
The good news, Drenkard told me, is that Louisiana’s low overall taxes (state and local combined) make it quite competitive with other states and, thus, attractive for investors and for people to move and live here. Depending on how one measures the tax burden, Louisiana is either the first, third or fifth lowest-taxed state in the union.
The problem, he said, is the way the system is structured. The Tax Foundation rates Louisiana only 35th best in the nation in terms of “business tax climate.” It’s inefficient. Compliance costs are high. And much of the burden falls on businesses, including small ones, in ways that deter job-creation.
The Tax Foundation rates Louisiana’s sales taxes as the single worst in the country for business. Not only are the rates high, but they also are levied on many “business inputs” — various services and transactions — that aren’t taxed in other states. The foundation’s report explains: “This tax can hurt the business tax climate because as the sales tax rate climbs, customers make fewer purchases or seek out low-tax alternatives. … The negative impact of sales taxes is well documented in the economic literature and through anecdotal evidence. ... High sales taxes, especially sales taxes levied on equipment, ha[ve] a negative effect on small business start-ups. Moreover, companies have been known to avoid locating factories or facilities in certain states because the factory’s machinery would be subject to the state’s sales tax.”
On the contrary, reports the foundation, “there is no economic reason to exempt gasoline from the sales tax, as it is a final retail purchase by consumers.” Putting sales taxes on gas while cutting overall rates would thus be an economically efficient, revenue-neutral trade-off.
Drenkard applauded Gov. Bobby Jindal’s proposal to eliminate most of the “refundable” portion — the part where the state actually cuts a check to a business, over and above the business’ tax liability — of various state tax credits. And he said Louisiana’s entire system of taxing inventory is a mess and should be jettisoned entirely.
“We’re planning to do a much more in-depth study of Louisiana in the next year, a comprehensive review,” Drenkard said. “We’ll have a wealth of information in the next six months, including on aspects of the system ranging from questions about federal deductibility of some taxes to proposals to reduce various tax rates and other reform components.”
Louisiana should piggyback on the Tax Foundation’s efforts, which amount to an unearned gift to the state. Jindal ought to call a special session late this summer to delve into all this. We can’t wait another year to get it right.
New Orleans native Quin Hillyer is a contributing editor for National Review. You can follow him on Twitter, @QuinHillyer. His email address is email@example.com, and he blogs at blogs.theadvocate.com/quin-essential.