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June is Too Soon

May 4, 2016

By: Stephen Waguespack

Here we go again.

This week, the drumbeat is ramping up for yet another special session to be held in June to increase yet another round of taxes.

As a reminder, this will be the third session in the past 12 months where raising taxes is the primary agenda item. In June 2015, over $400 million in new tax revenue was raised on employers of all sizes to fund the state budget in the final year of the previous governor. Another 14 tax bills were passed earlier this year in the special session called by the new governor, again primarily focused on employers, but also falling on the backs of all Louisiana consumers in the form of new sales taxes.

The combined effect of the 2015 and 2016 legislative sessions will increase business taxes by an estimated $575 million in this fiscal year and $1.2 billion next year and even more in 2018. And that is just the employer share of the burden, not to mention the hundreds of millions of dollars in new sales and excise taxes imposed on individual taxpayers beginning last month and scheduled to continue for the next few years. In all, the efforts from these combined sessions will raise more than $4 billion in new taxes over the next five years.

What should worry taxpayers even more, especially those in the private sector desperately trying to compete during an economic recession, is that all of these new taxes are just a precursor to the 2017 fiscal session. At that time, pretty much everyone expects a rewrite of the entire tax code and all the rules for most taxpayers will change again in a manner that no one seems able to predict. There is an opportunity to finally get the tax code right next year, but the experience of the last 12 months does not provide an optimistic outlook.

A state with bad tax policy that is consistent and concise is one thing, but bad tax policy that is ever changing and overly confusing is a death knell to economic growth. If reliability, consistency and stability are hallmarks to a solid economic foundation, then Louisiana’s economic house is built on a sinkhole made of Chinese drywall located behind a faulty federal levee.

Next week, the Revenue Estimating Conference (REC) will meet and likely repeat that the Louisiana economy is in a recession and that it is too early to tell how much revenue all these new taxes will actually bring in this year. Many in the Capitol are already speculating that the recently passed taxes will generate more money than originally expected, but those numbers are not yet firm and will remain unclear in the weeks ahead.

Meanwhile, the size of the budget deficit itself is a moving target. As a result of new revenue passed in the special session, the deficit decreased from $2 billion to $750 million. The Commissioner of Administration presented a revised budget with fewer reductions in early April. Since then, the deficit figure has been revised down again to $600 million, and history tells us that more fluctuations are likely in the weeks ahead.

Some will take all of this ambiguity as a clear message to call everyone back to Baton Rouge in June to raise more taxes just to be safe. Some will take it as a justification that strategic spending cuts or budget reform should be the priority. Others will say we should wait until later in the year to get some more facts before legislating any more.

When in doubt, do no harm. If you find yourself in a hole, one of the first things to do is stop digging. Legislators and the Administration are neck deep in a hole of taxation and it is well past time they put the shovels down.

Even before the billions in new taxes passed, the Tax Foundation ranked Louisiana’s overall business climate 35th, our corporate income tax code 38th and our sales tax code last in the nation due to high rates, a weak base structure and administrative complexity. Since the actions taken in the special session, Louisiana is now one of only nine states to tax manufacturing machinery, 14 states to tax manufacturing utilities and three states to cap Net Operating Losses.

Despite all of this action, rhetoric in the Capitol continues to point to business tax exemptions as a primary problem plaguing the state budget – which is categorically false. In fact, corporate exemptions and business taxes have been a primary target of the Legislature in 2015 and 2016. What has been done so far?

  1. All corporate tax credits were reduced by nearly one-quarter to one-third.
  2. All sales tax exemptions that benefit the business climate have been cut or eliminated. 
  3. The franchise tax has been increased and expanded to more businesses. 
  4. The deductibility of corporate income taxes paid to the federal government is on the ballot for elimination this fall. 
  5. Various laws have been passed to increase the corporate tax burden from add-back requirements to changes in calculations for taxes paid in other states. 

All the while, no serious efforts have been contemplated and no legislation has been passed to cut budget dedications, alter generous subsidies to local government, reform expensive entitlements, reduce government spending, improve the budget process or actually reform the tax code. Instead, even after raising billions of dollars, popular programs such as TOPS are being threatened with disproportionate cuts despite the fact the proposed state budget is over $2 billion larger than the one passed last July.

Coming back in June to pass new taxes for the third time in 12 months before anyone knows how much money was raised by legislative actions taken just a few weeks ago is clearly premature. If this happens, legislators will be asked to vote on more taxes without any confidence in the size of the actual budget hole they are asked to fill.

Instead, the Legislature needs to do its due diligence to shift the proposed budget reductions to areas of lower priority, where funding may not be needed until the latter half of the fiscal year. The budget they pass would be balanced, and information can be gathered on tax collections in the months ahead. The Legislature can always convene later in the year when revenue collections are actual, not estimates, and the size of the budget deficit is crystal clear. A fiscal session can make any further adjustments to the tax code at that time, only if necessary, and supplemental appropriations can finalize the budget figures when they are real.

June is no time for another tax session. The state’s economists have repeatedly testified that the impact of the 2015 income tax changes and 2016 sales tax changes will not be known until after this fiscal year ends, probably in July or August at the earliest. This fall, we may finally know the actual numbers of tax collections and the size of the remaining budget gap, if any.

Until those numbers are known, policymakers should just put their shovels down.