Revenue Study Commission Agrees with LBP Report on Tax Exemption Reform

by David Gray and Steve Spires

Louisiana spends hundreds of millions of dollars each year through its tax code with scant oversight and little idea whether the state is getting a positive return on its investment.

That was the conclusion of the Revenue Study Commission, the 14-member panel created last year by the Legislature to review Louisiana’s 468 tax exemptions that drained $5 billion in potential revenue from state coffers in 2012. The committee’s recommendations closely mirror similar recommendations by the Louisiana Budget Project in a recent report. Both reports call for limiting the cost of tax exemptions, mandating sunset dates, conducting regular reviews of all tax exemptions and performing more cost-benefit analyses to make sure that taxpayers are getting a good return on their investment.

The LBP report goes one step further than the legislative committee by calling for a change to the two-thirds requirement for modifying and eliminating outdated, costly and ineffective tax breaks. The current supermajority requirement allows a minority of lawmakers to protect costly tax breaks that don’t have majority support.

As Louisiana contemplates a fifth consecutive year of cuts to health-care, education and other critical services, the need to reform the tax exemption process has never been greater.

The most recent Tax Exemption Budget, released this week, shows Louisiana spent close to $5 billion on tax exemptions in 2012 – up from $4.8 billion in 2011 and $1.8 billion just a decade ago. This increase is significant because every dollar the state spends on tax exemptions is a dollar that cannot be used to fund education, health-care, public safety and other services.

Much of the revenue loss draining the state budget is due to tax exemptions far exceeding their expected cost. For example, the state’s alternative fuel tax credit drew unwanted attention last year when its cost began to spike far above initial forecasts. When lawmakers approved this tax break in 2009, the Legislative Fiscal Office estimated its five-year cost would not exceed $1 million. But the credit ended up costing Louisiana $25 million in the 2011-12 fiscal year, and could have exceeded $100 million had Gov. Jindal not rescinded a rule that allowed owners of “flex-fuel” SUVs to claim the $3,000 credit.

This type of out of control spending and lack of accountability doesn’t occur with regular government appropriations for two reasons: The Legislature must pass a budget every year and state spending is restricted by available revenue. But tax exemptions essentially operate as a “hidden budget,” with the result being rising costs – whether the state can afford it or not – and inadequate legislative review.

Some of the fastest growing tax exemptions are ones that are proven to have a poor return on investment. Consider the state’s lucrative motion picture tax credit, which cost taxpayers $227 million in 2012 – or almost 30 percent more than the previous year. The Louisiana Economic Development department says Louisiana taxpayers get back less than 15 cents of every dollar spent on this program.

The committee’s report recommends several tax exemptions for “further review and potential legislative action,” including film tax credits, Enterprise Zone credits and the tax break for horizontal drilling – all exemptions that LBP has raised concerns about in the past.

As the Legislature attempts to overhaul Louisiana’s tax code during the upcoming session, policymakers should follow the committee’s lead and reform this broken tax exemption process. Every tax break should be subject to periodic review, caps should be imposed to control year-to-year costs, sunset dates should be mandated, and the two-thirds threshold for modifying exemptions should be reduced. Adding these safeguards will prove more effective than reviewing and revoking wasteful exemptions after they already cost taxpayers millions of dollars.

They include details about safety-net programs like Medicaid, tax credits for low-income workers and educational scholarships and help promote a better understanding of how safety-net programs affect different communities across our state.
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