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Tax and budget: state of play

Posted on May 8, 2017

As the 2017 Legislative Session nears its midpoint, lawmakers are no closer to solving for the nearly $1.5 billion fiscal cliff than when the session began. Instead of shoring up Louisiana’s shaky tax structure,  the House passed a budget that contains hundreds of millions of dollars of unprecedented cuts to healthcare and safety-net programs. This includes a $235 million cut to the Department of Health (on top of the $184 million state general fund reduction included in Gov. John Bel Edwards’ budget) and a $19.5 million cut to the Department of Children and Family Services.

The cliff

The debate over the fiscal year 2018 budget also muddles the conversation about fixing the state’s broken tax structure. The state faces a fiscal cliff that the House Fiscal Division pegs at nearly $1.5 billion (see House Fiscal Division graphic below). The major driver of the cliff is $1.38 billion in temporary taxes that roll off the books on June 30, 2018.

The chart also shows the structural imbalance with the state’s budget. The recurring tax revenue the state collects through sales, income, corporate and other taxes is simply not enough to maintain the basic services we have now – let alone make badly needed investments in education, public health and safety-net programs.

The “stand-still” budget approved by the House would, in fact, take Louisiana backwards by cutting education, healthcare and other services that, in many cases, already have endured years of reductions.  Higher Education Commissioner Joe Rallo explained it well:

“People talk about a stand-still budget but the budget we’ve been presented is basically $18 million less for higher education…increased costs in retirement and medical, so it’s really not a stand-still budget,” Rallo said. “It would represent a loss.”

While some legislators have tried to blame Louisiana’s budget problems on runaway government spending, the reality is that the state general fund spending proposed in the House budget is 20 percent less than in 2008 after adjusting for inflation.

Avoiding the cliff will require new revenue. No single bill can solve the problem. Instead, a number of instruments will need to pass in the next five weeks if the Legislature wants to avoid another special session.  

 

Options on the table

A number of bills have been introduced to help put Louisiana on a sustainable revenue path. If a comprehensive package of legislation does not pass, the state would end up in the same position of large cuts to state services on top of all that have been imposed to date.

Here are the Legislature’s revenue options:

  • Eliminate federal income tax deduction ————————————————– $796 million
    • The state spent $6.7 billion on tax expenditures in 2015 – 16. The largest exemption- by far- was the deduction for federal taxes paid on personal and corporate income tax returns, costing the state over a billion dollars. Louisiana is one of only three states (Iowa and Alabama are the others) that have this exemption on the books. A number of bills have been introduced that would eliminate the federal income tax deduction, including HB 630 by Rep. Ted James. Fiscal notes this year are pegging elimination of the federal income tax deduction for personal income taxes at $796 million. Because it would require a constitutional change, this revenue cannot be counted on as part of the solution to the cliff– “bridge” revenue is needed. Some reports indicate that lawmakers are thinking about renewing the temporary one-cent sales tax. If that is the case, one path to a more permanent solution would be to tie an early “roll-off” of the penny to passage of a Constitutional amendment that eliminates the federal income tax deduction and allow the people of Louisiana to have a say in fixing the state’s broken tax structure. This tax swap would be a net tax cut for most Louisianans.

—> The 1-cent temporary sales tax was projected to raise $880 million when passed last year.

  • Reform excess itemized deductions—————————————————-$164 – $306 million
    • A number of proposals would pare back excess itemized deductions, another generous personal income tax break. Rep. Malinda White’s HB 254 would only allow 50 percent of excess itemized deductions and raise about $164 million, while Rep. Barry Ivey’s HB 373 that only allows the deduction for charitable contributions raises close to $306 million. Another component that should be considered is eliminating the deduction for state income taxes paid that is embedded in this tax break. This would raise an estimated $101 million according to the Institute on Taxation and Economic Policy.
  • Extend temporary “haircuts” to tax credits——————————————$135 million (total)
    • Rep. Katrina Jackson has a package of bills that make permanent reductions to certain tax credit programs that originally were reduced temporarily.
    • HB 174 would raise about $31 million by limiting the deduction for taxes paid in other states to either the actual amount paid or the equivalent that would have been paid in Louisiana tax, whichever is lower.
    • HB 247 raises nearly $83 million by repealing the sunset date for reductions to various corporate income tax credits.
    • HB 274 raises $21 million by making other corporate income tax credit reductions permanent.
  • “Clean the pennies” of the sales tax ———————————————————-$196 million
    • “Cleaning the pennies” of the sales tax refers to removing exemptions from the state’s sales tax that aren’t constitutionally protected. HB 609 sponsored by Rep. Jay Morris proposes cleaning the pennies. The fiscal note estimates $196 million additional revenue via this legislation. A good synopsis of the various exemptions is available from the Department of Revenue here.
  • Extend sales tax to services taxed in Texas—————————————————-$251 million
    • HB 655 sponsored by Rep. Gene Reynolds would extend the sales tax to services taxed in Texas. The fiscal note estimates this policy would raise $251 million.
  • New business tax—————————————————————————————Uncertain
    • HB 648 sponsored by Rep. Kenny Havard would lower the corporate income tax rate significantly but broaden its base by eliminating exemptions. The original fiscal note stated that there was too much uncertainty over how much the bill would raise to project a specific number though it did note a range of $185 million – $225 million. However, additional adjustments are being made to the bill which will likely affect the revenue estimate.

If all of these instruments passed into law, the state would raise at least $1.5 billion (depending on which excess itemized deduction reform bill passed and on how much HB 648 raises). This shows that there is little wiggle room for revenue raising measures to fail. In addition, as noted above, bridge revenue is needed to account for the federal income tax deduction elimination going to the ballot. This would have to either be accomplished through renewal of the one-cent sales tax or via adjustments to personal income tax brackets or rates.

 

What’s happening?

Any tax reform package has to pass a two-thirds vote of both the House of Representatives and the Senate. No revenue raising measures have passed the House Ways and Means Committee so far.

 

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