Gov. Bobby Jindal’s proposal to raise the burden of business-inventory taxes is an awful idea. The Legislature should ignore it.
Everyone knows state government faces a serious fiscal crunch next year. In his budget document released Feb. 27, Jindal proposed to close a whopping $1.6 billion shortfall with a mixture of lower spending and higher revenue. But, largely because he quite publicly signed a pledge (from the national group Americans for Tax Reform, or ATR) to oppose “any and all efforts to increase taxes,” Jindal must find a way to portray the revenue raisers as something other than tax hikes.
Enter the state’s “refundable tax credit” for inventory taxes that businesses pay to Louisiana’s local governments. It’s somewhat complicated. Many of those local governments, desperate for revenue in a state whose constitution allows them few revenue-raising options, place a tax on the value of all physical inventory at the end of each calendar year. This puts Louisiana at a tremendous competitive disadvantage economically, because only 12 other states allow such a tax, which tends to chase businesses away.
Since 1991, the state effectively has subsidized localities by letting inventory taxes remain in place while providing the affected businesses a dollar-for-dollar credit on state taxes. If the state tax liability is less than the amount of inventory taxes paid to the locals, state government cuts the businesses a check — a refund — for the difference. In 2014, of the total credits of $453 million, $377 million went out in refunds.
Jindal’s team had a eureka moment. ATR considers as a tax hike any elimination of the nonrefundable portion of a tax credit — but it characterizes the refundable portion, meaning the check the state sends to businesses, as “spending.” Thus, ATR will not consider it a broken pledge if Jindal jettisons the refund.
For most tax-credit systems, this makes some sense. A check from the government is not the same thing as a mere reduction in the amount of a check sent to the government.
In this case, though, it’s mere semantics. Because states vary widely in how they divide responsibilities, revenues and taxing authority between state government and local ones, all good tax-analysis comparisons (of state versus state) consider state and local taxes together as one unit.
A state refund that subsidizes a favored business is far different from a state refund that merely repays a business for taxes it sends to local governments. The end result of eliminating the inventory tax credit is not that businesses stop getting paid for doing business in a state; the end result is that businesses, yes, pay more money to government. No matter what one calls it, therefore, Jindal’s proposed elimination of this particular “refund” is, in practical effect on the businesses involved, a tax increase.
Now this isn’t to say that state government can get by without new revenue. For argument’s sake, let’s assume it can’t. The question is, if Jindal needs new revenue, is this the most reasonable, least harmful way to do it?
Most people think not. Jindal’s own team has, in other contexts, pointed to several other major tax-incentive programs that don’t provide good bang for the buck. (One favorite whipping post among many pundits is the tax credit for movies filming here — not necessarily its existence but its size). Yet because those tax credits aren’t refundable, any diminution of them would count as a “tax hike” by ATR’s reckoning and thus violate Jindal’s signed anti-tax pledge.
Jindal is jumping through similar hoops to provide an option (too complicated to explain in the space allotted) for a cigarette-tax increase in a way that doesn’t “count” as a tax hike. The whole contraption approaches the illogic of Wonderland.
On one hand, when a politician makes a promise, he should keep it. On the other hand, good public policy is more important than a promise; if a politician already is traducing the spirit of the pledge, he should do so in ways that don’t make Louisiana far less economically competitive with other states.
Let’s keep the inventory-tax refund but kill other, nonproductive tax credits. And raise the cigarette tax with no complications — and, for political cover, call it a “fee” for associated health services.
New Orleans native Quin Hillyer is a contributing editor for National Review. You can follow him on Twitter, @QuinHillyer. His email address is qhillyer@the advocate.com, and he blogs at blogs.theadvocate.com/quin-essential.