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Flat-tax plan would be a costly mistake

Posted on June 14, 2016

By Jan Moller

There is an understandable desire among some legislators to ensure that any revenue increases approved in the second special session are part of broader reforms. Unfortunately, a flat tax proposal that awaits action by the Louisiana House is a flawed approach to restructuring the state’s income tax.

An economic analysis by the independent Institute on Taxation and Economic Policy (ITEP) found that these bills – House Bills 7 and 17 – would result in $113 million per year in lost revenue to the state. That’s money Louisiana can ill afford to sacrifice at a time when critical health, education and public safety programs are threatened by budget cuts.

 

Screen Shot 2016-06-14 at 3.37.02 PM

 

The analysis shows that the average taxpayer in most income brackets would see a net tax cut. The only exception is households with annual incomes between $99,000 and $204,000, which would see a slight increase.

House Bill 7 is a constitutional amendment that eliminates the ability to deduct federal income taxes on state returns, and caps the state individual income tax rate at 4.75 percent. The companion bill, House Bill 17, changes the state income tax from its current three-tiered structure to two rates – a zero percent rate on the first $12,500 of annual income ($25,000 for married couples filing jointly) and 3.8 percent rate on all other income. It eliminates most existing deductions, save for a $1,000 credit for the blind, deaf, disabled and elderly.

 

Income Range (single filers) Current Tax Rate Proposed Tax Rate
$0-$12,500 2% 0%
$12,500 – $50,000 4% 3.8%
$50,000 – above 6% 3.8%

 

To be sure, these bills contain an element that’s key to future income tax reform. Removing the federal income-tax deduction would put Louisiana in line with 47 other states and the District of Columbia that don’t allow this costly tax break.

But approving these bills in the heat of a special session would squander a historic opportunity to reform Louisiana’s income tax code in a responsible fashion that generates new revenue by broadening the tax base and eliminating outdated, expensive deductions.

These bills would also:

  • Undermine the work of the Tax Force on Structural Changes in Budget and Tax Policy, which has been meeting weekly since mid-March and will make recommendations in September for reforming Louisiana’s tax system. The task force recommendations are expected to lay the groundwork for reforms that will be undertaken in the 2017 fiscal session of the Legislature.
  • It adds unnecessary risk to the 2016-17 budget. House Bill 7 requires a statewide vote that would not occur until November. The revenue loss that could result from a flat tax would force legislators to make mid-year budget cuts.
  • It ties the hands of future legislators. Capping the state income tax rate through the constitution is an unwise move that could have unintended consequences in the future. No one knows what the state’s revenue needs will be 30 or 40 years from now. Legislators may see the need for additional income-tax revenues, and should be able to do so without altering the constitution.

The Legislature should use the remainder of the special session to focus on raising enough revenue to avoid deep cuts to critical services.  House Bill 38, for example, would raise more than $100 million by reducing the amount of federal deductions that people could claims on their state returns. It would primarily affect wealthy households, who already pay low income taxes compared to their peers in other states because of the generous deductions in our tax code.

When legislators return to Baton Rouge next April, the onus should be on long-term structural reforms that get the state out of its destructive pattern of balancing the budget with one-time dollars and temporary taxes.

 

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