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Putting Louisiana back together: How government can repair state’s ‘broken’ tax system

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From The Advocate

After years of making short-term decisions that allowed them to avoid hard choices, state lawmakers have reached a crossroads: They will have to vote beginning next month on which taxes you, your neighbors and Louisiana businesses should pay as they seek to put the state’s disastrous balance sheet in order.

Lawmakers will have a potential roadmap in hand, from a task force of experts who spent a year studying Louisiana’s tax system and declared it “broken and inefficient.” The group recommended a sweeping overhaul of the state tax code that would eliminate big breaks while also reducing rates.

Analysts from the left and right have released recommendations broadly similar to those proposed by the task force. Lawmakers will have to decide whether to approve the package when the Legislature begins its annual session in April.

The state’s bad economy has contributed to Louisiana’s fiscal problems. But in many ways, the crisis is of the Legislature’s own making. Year after year, lawmakers passed budgets that didn’t balance, and they went along with former Gov. Bobby Jindal when he swept bare every fund under the state’s control.

More recently, legislators deliberately painted themselves into a corner by passing more than $1 billion of temporary taxes that expire in 2018 — an amount they will have a very hard time making up with spending cuts alone.

The big question, then, when lawmakers convene on April 10, is whether they will find the courage to seek a long-term solution to the state’s tax and budget problems. Their decisions will affect every Louisiana resident and business, from Abbeville to Zachary.

“Too many times we’ve seen the Legislature kick the can down the road,” said Michael Olivier, president of the Committee of 100 for Economic Development, the most prominent business group to endorse the task force’s recommendations. “We need this fix now, and it has to be done in a bipartisan manner.”

Special-interest groups that hire big-dollar lobbyists — as well as taxpayers fearful of having to pay higher taxes — will fight the changes.

“Every tax break has a constituency,” Jay Dardenne, the state’s commissioner of administration and a member of the task force, said in an interview. “Every tax credit and exemption was born out of an interest group saying it would produce for the economy if you don’t tax me.”

The most immediate need for legislators during the upcoming 80-day session is to solve the so-called “fiscal cliff,” which refers to the $1.2 billion in temporary taxes that will expire next year. Most of that revenue derives from a short-term penny increase in the state sales tax that lawmakers approved in 2016 — a fix that both Democrats and Republicans have said they don’t want to repeat.

To devise a more permanent solution, the Legislature created the Task Force on Structural Changes in Budget and Tax Policy, which in January called for ending numerous exemptions on sales taxes and individual and corporate taxes. The extra tax revenue that is expected to generate would allow legislators to reduce tax rates.

Gov. John Bel Edwards has praised the task force’s report in general terms. Later this month, he will announce which of the specific recommendations he will ask the Legislature to adopt.

Both houses of the Legislature are controlled by the GOP. But the position of House Republicans during the legislative session could be decisive because they often oppose Edwards, a Democrat, while the governor can count on a working majority in the Senate. House Republicans will determine at a March 16 retreat whether they will offer their own set of proposals.

In the meantime, another study group authorized by the Legislature, the Sales Tax Streamlining and Modernization Commission, will issue a report in late March or early April that will also call for broadening the tax base and reducing the sales tax rate.

On yet another front, the Edwards administration next week will offer a package of proposals to revise a much-maligned giveaway that allows producers to claim big tax subsidies to make movies and television shows in Louisiana. Taxpayers will pay $180 million to producers this year to film in Louisiana and another $180 million next year, but after that, the law’s fate is up in the air.

But the major focus this year will be on how to respond to the task force’s broad recommendations.

The group’s 13 members — representing the Edwards administration, business interests, labor unions, local governments and good-government groups — have called for wholesale changes.

Tax breaks have proliferated over the years to such an extent that the state now exempts nearly as much revenue from taxes as it collects. The state did not collect $6.8 billion last year in sales and income taxes because of tax breaks, according to the Department of Revenue’s “Tax Exemption Budget,” released Thursday, while it collected $7.2 billion.
“We need to bring our rates down, get rid of some of these exemptions and credits and reduce the complication,” Barry Erwin, a task force member who is president of the Council for a Better Louisiana, a good-government group, said in an interview. “We really do need to look at this with a sense of urgency. We’ve been through almost a decade of constant budget cuts, and there are more on the horizon. That’s where we are unless we fix our tax structure in such a way that tax revenues grow with our economy.”

The task force called for shifting away from sales taxes and more to income taxes, in part to reduce what the members see as an over-reliance on sales taxes but also to make the tax code more progressive.

Louisiana’s tax system hits the poor the hardest. Families that earn $17,000 or less — the bottom 20 percent — pay 10 percent of their income in state and local taxes, while families that earn at least $470,000 — the top 1 percent — pay only 4.2 percent, according to a recent report by the Louisiana Budget Project, a left-of-center nonprofit.

The biggest changes sought by the task force would eliminate the provision that allows wealthier individuals to deduct on their state taxes what they pay in federal income taxes. This change, which would require approval first by legislators and then voters statewide, would raise nearly $1 billion per year.

The task force also recommended limiting another popular income tax break that allows individuals to write off deductions that they itemize on their federal tax returns and that are in excess of the federal standard deduction. That would raise $350 million a year.

The task force also called for lawmakers to reduce Louisiana’s corporate income tax rate, which at 8 percent is the highest in the Southeast. The task force advocated coupling that move with eliminating or paring back tax breaks that riddle the corporate tax code — so much so that the Department of Revenue has collected only $2 million in corporate taxes during the first eight months of the current fiscal year.

The task force is also calling for dramatic changes with Louisiana’s sales tax, which at 10 percent is the highest in the country. That’s not the tax’s only shortcoming: Experts deride Louisiana’s sales tax system as the worst in the country because of its mind-numbing complexity.

Louisiana’s taxpayers may not see it this way, but they have among the lowest tax burdens in America, according to the Tax Foundation, a Washington, D.C.-based nonprofit. Louisiana ranks 45th in state and local taxes as a percentage of income, the group says.

Taxes have remained low because legislators — under Jindal and Edwards — have repeatedly cut state government programs. State spending from state tax payments, fees and tuition has dropped by 7 percent since 2009, according to the state Department of Revenue.

Republicans in the House have already indicated, however, that they will push for more cuts to a government that they believe is bloated.

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