In less than three months, Louisiana legislators will convene for their annual session. It’s an odd-numbered year, which means it’s a two-month “fiscal” session that’s supposed to be focused on tax policy. But if predictions around the Capitol are to be believed, there is little reason to expect fundamental change to a tax structure that has left Louisiana with a $1.4 billion budget shortfall and the possibility of $300 million in cuts to public colleges and universities.
That’s a mistake.
This morning the Institute on Taxation and Economic Policy released the latest version of its Who Pays? report, which breaks down the tax burden in each of the 50 states by income brackets. It’s a useful reminder that one of the perverse side effects of being poor in America is that you typically end up paying more of your income in state and local taxes than people at the top of the income pyramid.
The good news for Louisiana is that things could be worse: Louisiana’s tax system ranks as the 19th most unfair in the country. The bad news is that while households with incomes below $32,000 per year pay an average 10 percent rate in state and local taxes, the top 1 percent (those who earn above $471,000 per year) pay just 4.2 percent. Middle-income families – who make between $32,500 and $50,000 per year, pay a 9.5 percent tax rate.
The reasons for this disparity are familiar. Louisiana has the 3rd highest combined (state and local) sales tax rate in the country, and some of the lowest property taxes. The wealthiest Louisiana households also benefit from lucrative income tax breaks not available to the poor and middle-class, which reduces the progressivity of the state’s income tax.
There are a couple of problems with such an unfair tax system. The first is that it doesn’t produce the revenue Louisiana needs to adequately fund its schools, hospitals and infrastructure. The second, as the New York Times notes, is that the widening income inequality that this regressive tax system promotes works as an overall drag on the economy.
A growing number of mainstream economists have been warning about the links among inequality, tax policy and slower economic growth. In September, the credit ratings agency Standard & Poor’s issued a report that noted regressive state taxes and income inequality seemed to go hand in hand and served as a drag on the economy.
“Through a progressive tax structure, it’s possible to counteract much of the depressing effect inequality has on tax revenue growth rates,” the S.&P. report said.
While popular lore says voters are opposed to any tax increases, even on the rich, that isn’t quite true. Here in Louisiana, a majority of state voters in 2002 voted for the progressive “Stelly Plan” that raised income taxes on upper-income households in exchange for eliminating the state sales tax on groceries, drugs and residential utilities.
The Stelly Plan, as we all know, was repealed by unanimous votes of the Legislature in 2007 and 2008 (but not by a vote of the people). Yet it turns out that the voters who supported that plan knew exactly what they were doing, as surveys show people of all political persuasions favor a progressive tax system. As The Times reports:
Rather than relying on experts’ opinions, WalletHub, a consumer finance information and social networking site, surveyed taxpayers for a definition of fairness when it did its own analysis of state tax systems last fall.
“Let’s not try to guess what is fair and what is not,” Odysseas Papadimitriou, the chief executive of WalletHub, explained, “Let’s ask Americans.”
“We were surprised to find both liberals and conservatives believe that the most fair system is a progressive one — taxing the poor less than the rich,” he said. “They disagreed how much, but they agreed that it should be progressive.”
Fortunately, there are some common-sense steps the Legislature could take that would move Louisiana toward a more progressive tax system:
- Increase the Earned Income Tax Credit (EITC), which benefits low-income working families with children. Louisiana is one of nearly two dozen states with its own EITC, but at 3.5 percent of the federal credit it is the lowest in the country. Doubling the credit would put more money in the pockets of hard-working families.
- Eliminate the state deduction for federal income taxes. Louisiana is one of only six states that allow this tax break, and one of just three states that allow all federal income taxes to be deducted from a state return. This tax giveaway costs Louisiana more than $600 million per year and accrues mainly to high-income households.
- Reinstate the Stelly Plan income-tax brackets, and eliminate the deduction for federal excess itemized deductions.
Legislators would also be wise to curb tax breaks for large, out-of-state corporations, such as the Enterprise Zone tax credit that has strayed far from its original intent and now accrues largely to big box retailers. These tax breaks do little—if anything—to improve economic opportunity, but mean the state has fewer resources to pay teachers, doctors and college professors.
The political calculations may say that an election year is the wrong time to make major changes to the state tax structure. But the facts tell a different story. With a $1.4 billion gap between revenues and expenses and a system that makes poor families pay twice as much as the top 1 percent, Louisiana doesn’t have the luxury of waiting another two years for change to occur.