The recent controversy over Louisiana’s alternative fuels tax credit shined a bright light on the dangers that lurk in “tax expenditures”—money the state spends though the tax code in the form of exemptions, credits and rebates.
To recap, in 2009 the Legislature created a tax credit of up to $3,000 for any person or corporation that bought a vehicle that ran on electricity, natural gas or other “alternative fuels,” or modified an older vehicle to do the same. At the time, the Legislative Fiscal Office estimated that the credit would cost a modest $200,000 annually.
Fast forward three years, and the Monroe News-Star reports that the credit’s cost could exceed $100 million in the upcoming fiscal year due to a rule issued by the Department of Revenue. In an attempt to clear up confusion over what vehicles qualified, the department said in April that “flex fuel” vehicles—which can use either ethanol or gasoline—would be eligible. This dramatically increased the number of eligible vehicles, and resulted in a deluge of amended tax returns going all the way back to 2009 as taxpayers and their accountants rushed to claim the credit.
After the high cost of the change became apparent, Gov. Jindal cancelled the ruling and Secretary of Revenue Cynthia Bridges resigned. However, the issue remains unresolved and a new ruling will likely be needed in the near future.
The whole episode highlights two of the biggest problems with tax exemptions: lack of accountability and spiraling costs.
Interim Revenue Secretary Jane Smith, who sponsored the tax credit as a member of the Legislature, has said the intent was to boost demand for natural gas by encouraging conversion of vehicles to run on compressed natural gas. However, this wasn’t obvious in the text of the law, prompting the Department of Revenue to issue a rule that was meant to clarify things.
Another purpose of the credit is to encourage the use of fuels that produce less air pollution. But while flex fuel vehicles can run on ethanol, most owners actually use gasoline. Clearly, giving an alternative fuels tax credit to a flex fuel owner who fills up with gasoline neither supports natural gas producers nor helps the environment. It is simply a misguided $3,000 subsidy funded with taxpayer dollars.
In this case, a slight change in administrative wording could have funneled more than $100 million to a select class of vehicle owners at a time when basic health-care and education services are being cut.
But make no mistake, the alternative fuels credit is not an anomaly. Together, the 464 tax exemptions on the books represent a $4.8 billion “hidden budget” that operates on auto-pilot regardless of whether the exemptions are achieving their intended goals or are even affordable Over the past decade, the total cost of tax exemptions has increased 167 percent, from $1.8 billion to $4.8 billion (adjusted for inflation). The uncontrolled growth in the cost of tax exemptions is a major cause of Louisiana’s fiscal woes.
By comparison, the state’s regular budget is evaluated every year by the Governor and the Legislature so that changes can be made, both to reflect available revenues and to make sure that the state’s needs are being met. Tax exemptions should be subject to the same kind of scrutiny and accountability as other spending.
As policymakers discovered last week, having this much spending occur outside the normal appropriations process makes it nearly impossible to control costs or enforce accountability, which can result in unpleasant surprises.
Steve Spires, Louisiana Budget Project Policy Analyst
See the News Star op-ed here.