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A Taxing Effort

May 11, 2015

By: Stephen Waguespack

Last Thursday was quite a taxing day in the Louisiana Legislature.

Not in the sense of being long and tiresome, rather, it was taxing in the sense that many votes were taken to raise your taxes.

On May 7, the Louisiana House of Representatives voted repeatedly to raise taxes on employers and individuals by $664 million in 11 different bills. Likely the largest single-day tax increase effort in the history of the Louisiana Legislature, this collection of tax hikes was broad in its scope and impact on the private sector. Even more surprising, the initial reaction from most legislators was that it wasn’t enough and they needed to pass more tax increases soon.

The potential impact of these tax increases to our growing economy was not mentioned much in the short debate and did not appear to serve as a speed bump for this runaway freight train, especially considering that the debate on all 11 tax bills lasted only four hours. In fact, the average amount of taxes raised per minute of floor debate was $2.8 million. Rather efficient work.

The effort was so efficient and void of much substantive debate, many of the items contained within the proposals were unclear to those in attendance. This is a fitting dynamic, considering false choices, confusing terminology, and heated rhetoric have dominated much of the budget discussion this legislative session. In an effort to help clear up some of this unnecessary confusion, it may be helpful to list a few items that tries to clarify the state of play.

  • ALL businesses in Louisiana will be affected by the taxes raised by the House: multi-national corporations, homegrown Louisiana companies, start-ups and entrepreneurs, and small businesses on every corner in the state. The impact of additional taxes will be felt in every industry sector – petro-chemical, technology and digital media, telecommunications, oil and gas, auto dealers, retail and restaurants, maritime and ports, among others.
  • Many small business owners file their tax returns as individuals, not corporations, and their income and contribution to the state are calculated differently as a result. Louisiana’s small business owners are included in the House-passed tax increases as S-corporations, LLCs, and sole proprietors.
  • Several bills passed in the House that layer on top of one another, reducing the same tax credits multiple times in order to maximize revenue for the government to maintain its current size. The fact is that tax collections are currently projected to increase over the next five years thanks to a healthy economy – and government will grow with it – even without the significant increases passed by the House.
  • State representatives reduced tax credits and exemptions by only a majority vote last week, which is a risky maneuver considering the Constitution explicitly requires a two-thirds vote to raise taxes and to repeal tax exemptions. The 1993 Attorney General’s opinion cited as the rationale for only seeking a majority vote actually reiterates the fact that a two-thirds vote was needed. That opinion clearly authorizes a majority vote only in the case of resolutions to suspend laws; only one tax vote last week was by resolution. This parliamentary decision could put any final budget solution in a legally precarious position.
  • The House voted to reimpose almost half of the inventory tax: 20 percent of the entire credit would be repealed in one bill and another 25 percent of the refundable portion would be delayed in another instrument. The inventory tax is widely seen by experts as a tax on economic growth and very few states collect it. If a combined 45 percent impact of the inventory tax is felt by the economy, inventory will leave the state, local government collections will decrease dramatically, small businesses will scale back inventory options and increased costs will be passed on to Louisiana consumers.
  • The House voted to add a 1 cent tax on the utility expenses of businesses for a year, hitting those companies the hardest that have recently announced major industrial expansions and pledged to create thousands of new jobs across the state. The manufacturing renaissance is alive and well in Louisiana, but this action has the potential to push us back to the dark ages of slow manufacturing growth and lost investment opportunities.
  • The House voted to reduce tax credits for employers who hire former offenders and companies that make donations to public schools among many other state incentives in the tax code intended to encourage activities that ultimately benefit the state.
  • The House voted to raise individual taxes as well, such as reducing the tax credit for the educational expenses of children, for households that include dependents physically or mentally incapable of caring for themselves, and for organ donations among many others.
  • The single largest tax exemption in Louisiana is the federal income tax deduction that benefits every person who pays taxes in Louisiana, totaling more than $1 billion annually. Only a handful of states in the country authorize this deduction, which is protected in Louisiana’s Constitution.
  • The Louisiana state budget is $9 billion larger today than it was 10 years ago. The judicial and legislative budgets, in particular, have grown in double-digit percentages in recent years. Surprisingly, there has been little discussion of implementing some level of spending reductions in these areas that could help the state resolve its deficit.
  • Louisiana’s annual state pension costs have increased 80 percent and our teacher pension costs have gone up 124 percent over the last decade. These increased costs continue to place an intense cost burden on the budget of Louisiana’s elementary, secondary and post-secondary schools, though no serious effort is being made to help contain these costs and increase the percentage of dollars that flow through to our classrooms.
  • We must take comprehensive and impactful steps to improve our higher education system, including stabilized funding, increased autonomy, greater scrutiny of low performing programs that are out of line with our workforce needs and bureaucratic efficiencies to make it more competitive. The lack of financial autonomy for higher education was a key component of the recent credit downgrade by Moody’s.
  • There are roughly $1.3 billion in general fund dollars locked up in non-constitutional, non-fiduciary funds in our state budget. There has been no real interest by the Legislature thus far to analyze these funds and determine which are no longer necessary and which can by eliminated in favor of freeing up dollars for higher education and health care.

Without a doubt, our budget shortfalls require serious proposals this year, with an eye toward a more thorough fundamental budget and tax reform effort next year. As this multi-step effort unfolds to address the needs of government, let’s hope our elected officials also remember to protect the growth of the private sector and the needs of the taxpayers just as much.