Quin Hillyer: Reform Louisiana taxes, but proceed with caution

If Louisianans are tired of finishing near the bottom of every rating of civic health, they should buy into major reforms.

In proposals within the last week, state Revenue Secretary Richard Nelson and the Pelican Institute think tank make good sense when pushing for a flatter, simpler, more growth-oriented tax system in Louisiana. Still, a little caution is in order.

On personal income taxes, Nelson proposes a flat rate of 3.8% on all income over $12,500. Pelican, in a paper to be released Monday, will propose a 3.5% rate. Nelson estimates the state would lose $500 million a year in revenue as a result of the reduced rates in his plan, but would make up for it largely by eliminating numerous targeted tax breaks and extending the sales tax to previously untaxed services. Pelican’s plan, on paper, would reduce revenues even more.

Both assume, though — Pelican more abundantly — that another large portion of the revenue loss on paper would be recouped through far more dynamic economic growth.

Pelican’s “fiscal reform” plan is comprehensive, calling for flattening not just personal income tax rates but also corporate income tax rates, along with eliminating the corporate franchise tax and the inventory tax. Noting that state spending has grown at twice the inflation rate for nearly a decade, Pelican also proposes an expenditure limit that would block state spending from rising faster each year than the inflation rate plus population growth.

Much more boldly, Pelican says both corporate and personal income taxes in Louisiana should be phased out, slowly but entirely. The think tank lays out an arithmetically cogent process for doing so.

To which, some observations are in order.

First, Pelican is right in noting that the dizzying complexity of Louisiana’s tax system, along with its imposition of outmoded, inefficient franchise and inventory taxes, “hampers entrepreneurship and family prosperity.” Louisiana increasingly is an outlier with its multi-tiered, multi-exemption system that causes compliance problems while retarding growth. For example, writes Pelican, “There are 99 exemptions, deductions, and credits for personal income taxes.” This system disfavors those with lower incomes who can’t afford accountants to take advantage of all these specialized provisions.

Second, both Nelson and Pelican rightly point out that a simpler system with lower rates will spur economic growth. Other states repeatedly prove it. It is a travesty that, as almost every other Sun Belt state boasts growing populations and economies, Louisiana is losing people and ranks near the bottom on almost every economic index. By comparison, as Pelican CEO Daniel Erspamer wrote in these pages on Sept. 27, “states with a flat or zero tax rate comprise 13 of the top 15 states in U.S. News and World Report’s ranking of the country’s best economies.”

Now, though, consider caveats.

First, as both Nelson and Pelican note — but as neither has fully detailed in their new plans — systemic spending reform also is necessary. While the dynamic “growth” effects of flatter taxes surely will replenish some of the “lost” revenue from lower rates, and while the elimination of special-interest exemptions will make up most of the rest, spending reform remains necessary to avoid so-called “fiscal cliffs.”

To that end, the Legislature should significantly tighten its system of mid-year “supplemental appropriations” in which it redirects several hundred million dollars each year from deliberately overstuffed original accounts into legislator’s pet projects, with less de facto oversight than in the regular budget process. Lawmakers should rein in the waste from this supplemental hocus pocus.

The second caveat is an eggs-in-one-basket warning. Pelican goes too far, even if its numbers technically balance, when it recommends a steady but eventually complete phaseout of both corporate and personal income taxes along with elimination of the franchise and inventory taxes. Those taxes together account for 38% of all state revenues plus a chunk of local revenues. This would leave the sales tax, already 27% of state revenues, to shoulder a much larger load for state government. This is unwise.

Every economist knows sales taxes are by their nature regressive, meaning they take a higher percentage of the income of low-wage workers than of wealthier people. Basic fairness suffers if there’s too large a reliance on sales taxes.

Second, while the revenue from almost every tax rises and falls with the strength of the economy, sales tax receipts are particularly — and quickly — susceptible to sharp drops during recessions. For revenue stability to protect crucial government services, it makes far more sense to have several major revenue sources. That’s why it may make sense eventually to phase out either the corporate income tax or the personal income tax — but not both.

With those caveats, Pelican and Nelson are pushing in the right direction. To jump-start Louisiana’s economy, lawmakers should pursue these reformers’ central recommendations enthusiastically.