Democratic Gov. John Bel Edwards’ long-awaited tax overhaul plan should do three big things or be dead on arrival.
On Monday, legislators get their first look at the package that Edwards hopes will pave the way to a stabler budget less plagued by deficits. That's when both Republican-led chambers should vet the governor's plans for adherence to three basic principles.
First, reform cannot act as a Trojan Horse to increase the total tax take by state government, except when shedding low-priority and/or wasteful tax rebates. Changes should bring a government that, on the whole, doesn't take more of what people earn, but instead allows them to create more wealth, which in turn will increase government revenue. The 2016 data ranking Louisiana 22nd in per capita spending among the states while 35th in per capita personal income proves that Louisiana does not have a revenue problem but a spending problem — a dilemma made worse by tax increases enacted for fiscal year 2015 and more tax hikes for FY 2016.
Second, governed by this revenue-neutrality standard, overall tax rates should revert to baseline FY 2015 levels if not prior to then. The roughly $1.6 billion tax increase since the beginning of last year (on top of about $800 million more enacted in 2015) not only fed bloated government but also depressed economic activity, which helped worsen budgetary shortfalls that are still complicating next year’s forecasted deficit.
In other words, as part of reform, policy-makers cannot replace with another tax the extra penny in sales tax due to roll off at the end of next fiscal year — or replace any other temporary tax. Those "temporary" taxes, after all, were supposed to be a bridge to fiscal reform that advances smaller government, not a crutch for the status quo.
Further, for permanent tax hikes authored in the past two years, such as on health insurance premiums and on many hospitals’ revenues to pay for Medicaid expansion, reform must include cuts elsewhere to neutralize those increases. At worst, reform must seek revenue neutrality according to the 2015 (or, better, 2014) baseline level; at best, it should provide overall tax reduction.
Third, reform must broaden the tax base while lowering marginal rates. Allowing far fewer exceptions simplifies the tax code — and steers government away from using tax policy to pick economic winners and losers, a boon for special interests. Additionally, the process can trigger spending reduction through cutting or eliminating rebates with overall negative fiscal impact, such as the Motion Picture Investors and Earned Income Tax Credits.
Unfortunately, Edwards has hinted at plans that largely fail these tests. He seems poised not to return to a 2014 or 2015 baseline, wanting instead to expand the sales tax base to compensate for losing the extra cent. His administration does back sunsets of inefficient tax breaks, but has remained silent on cutting rates elsewhere or tackling uneconomical rebates.
Worse, the administration has floated the idea of a gross receipts tax, which hits total sales rather than income, above a certain threshold to replace the corporate income and franchise taxes. Historically, this disproportionately punishes low-margin enterprises and smaller, less diversified entities and more generally increases consumer prices while decreasing jobs. And the Edwards Administration admits it expects the tactic to violate neutrality by raising more overall receipts.
If the governor's plan doesn't pass muster, lawmakers should sideline it in favor of a genuine tax plan that's built on those three basic principles of fiscal reform.
Jeff Sadow is an associate professor of political science at Louisiana State University-Shreveport, where he teaches Louisiana government. He is author of a blog about Louisiana politics, www.between-lines.com, where links to information in this column may be found. When the Louisiana Legislature is in session, he writes about legislation in it at www.laleglog.com. Follow him on Twitter, @jsadowadvocate or email firstname.lastname@example.org. His views do not necessarily express those of his employer.