After years of hewing zealously to a promise never to approve a tax increase — a pledge that he believes also prevents the elimination of any state tax breaks — Gov. Bobby Jindal on Friday unveiled a budget plan for the coming year that trims tax credit programs by a whopping $526 million.
If the Legislature goes along with Jindal’s pivot on tax giveaways, the resulting windfall would plug roughly one-third of the $1.6 billion shortfall in the 2015-16 state budget.
Nearly three-fourths of the savings the state would realize from cutting the tax credits would come from a single program: the inventory tax credit. That credit for the past two decades has provided a full refund for inventory taxes, a property tax paid by businesses to local governments in Louisiana.
The tax is paid by more than 100,000 businesses, but the biggest payers tend to be oil refiners and other heavy industries. Any major cut to the refund program will face a stiff headwind of opposition from the state’s business lobby.
Jindal aides said Friday that the governor would support a repeal of the inventory tax itself, a development that would make businesses whole and that the business community would thus welcome. But were such a repeal to occur, many local governments would see drastic revenue shortfalls, particularly in Louisiana’s industrial corridors along the Mississippi River and around Lake Charles. The government of St. James Parish, for instance, derives nearly 20 percent of its revenue from the inventory tax.
While Jindal’s proposal marked a change in philosophy, his plan would keep him in the good graces of Americans for Tax Reform, the powerful anti-tax lobby that promulgated the pledge Jindal and many other politicians have signed. That is no small matter for a governor in his final year in office who is hoping to make a run for the White House.
“We are not considering increasing the current tax obligation of any Louisiana taxpayer,” the administration said in carefully worded documents accompanying the budget plan.
Semantically, that may be true, for the inventory tax is a local levy, not a state one, and Jindal is simply proposing to cancel all refunds that are in excess of corporate and income taxes that businesses pay the state. Collections of those two taxes fell by about 60 percent between the time Jindal took office and the most recent fiscal year, to $384 million, according to the Department of Revenue — largely because of the explosive growth in exemptions and credits.
Patrick Gleason, director of state affairs for Americans for Tax Reform, says the group has blessed Jindal’s plan, saying, “Changing a tax credit from refundable to nonrefundable is a spending cut, not a tax increase.”
Businesses will regard the plan quite differently, however. “If you just repeal the credit, it is a tax increase of $462 million on employers,” said Stephen Waguespack, president of the Louisiana Association for Business and Industry, the state’s largest business lobby. “If we repeal the credits, we’re going to move down in all the rankings (of states) when it comes to competitive markets, and we’re going to incentivize employers to move their inventory. It’s about the worst signal you can send to small and midsized manufacturers in Louisiana right now.
“This is a time when we’re trying to talk about the manufacturing renaissance and the jobs we’re bringing. This throws sand into the gears of that effort.”
Some critics of Jindal’s tax policy were more circumspect about the governor’s plan, saying they were glad he had at least opened the door to limiting giveaways.
“I’m glad he opened a conversation about tax credits and rebates,” said Jan Moller, director of the liberal Louisiana Budget Project, who has criticized the runaway growth of tax breaks to business during Jindal’s tenure. “It’s too bad it’s constrained by these self-imposed rules that the governor has laid out. It seems like he’s putting legislators in a very tough position here.”
Steve Procopio, policy director for the watchdog Public Affairs Research Council, said PAR is glad Jindal is “looking at a lot of new options that were off the table before. That’s a good thing.”
But he worries that some of the dollars the administration claims it can wring out of the cuts might be more hopeful than actual.
“We have concerns about how real some of these numbers are,” Procopio said. “They may not get all of this.”
Moller praised the governor for leaving alone tax breaks that benefit the poor, including the earned income tax credit and a credit for school readiness. But he said he’d like to see consideration of limiting other giveaways, including some of those explored in a recent series in The Advocate, such as the tax breaks for fracking wells and film productions.
“Our hope is the Legislature takes this slight opening and broadens the debate to include more tax credits and not just the small menu of items the governor has laid out,” Moller said.
Intriguingly, Jindal’s budget protects some tax-credit programs his administration has been critical of, including the Enterprise Zone program and the film program. The reasons weren’t clear on Friday. Possibly Jindal decided that cuts to those programs would violate the no-new-tax pledge. It also might be difficult to realize much in savings in the current budget year by trimming those programs, because the credits come in the wake of large investments and thus have some built-in lag time.
Meanwhile, Jindal’s team has been highly critical of the inventory tax, which they essentially intend to restore by taking away the credit.
All told, Jindal outlined paring back refundable tax credits for 12 programs, but most are obscure and cost relatively little money. Apart from the inventory tax change, the biggest savings would come from paring back the credit the state now gives to people who install solar panels on their homes.
Scaling back that program — one of the state’s most generous, with taxpayers footing the bill for 50 percent of installation costs — would save the state $57 million this year, according to Jindal’s figures.
The program already was being phased out, but Jindal’s plan would accelerate its demise, and the state’s nascent solar industry reacted angrily.
“While many industries will be impacted by today’s budget proposal, the nature of the changes will completely kill the growing solar industry,” Jeff Cantin, the president of Louisiana’s trade association for solar and renewable energy, said in a prepared statement. He predicted the loss of at least 1,200 jobs if Jindal’s plan is adopted.
The solar industry has relatively few friends in the Legislature, however, while the business lobby — and in particular the petrochemical sector — is powerful. As such, it’s the proposed cut of the inventory tax refund that is likely to set off the most heated debate, observers say.
“Here’s the good news: It’s early; we’ve got a couple of months to work on this,” said Waguespack, who was a top Jindal aide before taking his LABI post. “I think most people look at this rebate as the wrong one to do away with. I’m optimistic that cooler heads will prevail.”
Moller said the inventory tax debate may force the Legislature to choose from an unappetizing menu of choices: angering the business lobby by supporting Jindal’s plan; hurting local governments by backing a plan to phase out the inventory tax altogether; or simply taking the ax, once again, to higher education and health care, which have borne the brunt of cuts in recent years.
Procopio, of PAR, threw in another unappealing possibility: that the governor and the Legislature, as they’ve done in many recent years, will pass a budget that is balanced only by dint of rosy predictions that aren’t met, setting off a round of midyear cuts and leaving problems for the next governor to deal with.
“If this is done badly, you can essentially kick the can down the road,” Procopio said. “Then you’re just leaving the next governor on the hook. There’s a lot of incentive to be as optimistic as possible on the part of the governor and the Legislature, but all that would do is defer the pain.”
Follow Gordon Russell on Twitter, @gordonrussell1.