The Tax Policy Center, a thinktank associated with the Brookings Institution, defines tax expenditure as “Revenue losses attributable to tax provisions that often result from the use of the tax system to promote social goals without incurring direct expenditures.”
Wiki is even more blunt:
A tax expenditure program is government spending through the tax code.
In other words, the state uses items such as tax credits, exemptions, deductions and exclusions to assist businesses, charities and individuals by providing preferential tax relief. But as well meaning as many of these tax expenditure items are its easy to see in the table below that they are quite out of control and that now you can argue that the tail is wagging the dog:
See table from page five of publication (Table in Millions of Dollars). Click here for full publication: Tax Exemption Budget 2014-2015
The state gives away 80% of its corporate income taxes and over half of its sales taxes. No wonder why we have budget problems and we’re not even counting rebates.
I’m not saying that tax exemption items are necessarily evil and in most cases they were justified to keep business competitive. However, as the charts illustrated perhaps we had too much of a “good thing” and now we simply can’t afford it any more. This is particularly the case for those tax preferences that haven’t achieved such desired results such as increased economic activity or job creation. The trick is separating the wheat from the chaffe and whether or not the business community is ready for an objective look at the myriad of tax preference items, such as the inventory tax exemption, which is simply a good idea run amock.
At a recent forum sponsored by the Louisiana Association of Business and Industry (LABI), lawmakers were urged to not tinker with the inventory tax exemption, but rather the simple solution was to just repeal the inventory tax. But if repealing the inventory tax was so easy, then why didn’t LABI do that in 1991 instead of push the phase in of an inventory tax credit, in which a company would pay its inventory tax to local government, but take a credit for it on their state taxes. This was probably the best that could be done at the time, but now has grown to be a nagging burden for the state. And even worse, there’s no real accountability since a company doesn’t care how much locals assess them for inventory tax, because it can receive a full credit for it from the state. Maybe that is why the credit has ballooned doubled over the past few years to $452 million. That is a huge hole to fill on a local level and why would local government have any incentive to change what has become a state subsidy. There is some talk about dedicating the tobacco tax increase to local government, but the figures I’ve seen on raising the tobacco tax to the southern average would only fill about one third of the whole from repealing the inventory tax.
Clearly, solving Louisiana’s budget problems are going to be very difficult and will of course dominate the upcoming session and should be the centerpiece of the governor’s race. But specific solutions are needed, if the state is going to have the best of both worlds, that is repealing a problem tax without adverse physical consequences.
I know that there are a lot of plans and a lot of discussions in the works and hopefully all parties, including the business community and local government, will be willing to come to the table for a solution that probably no one is going to be particularly happy with, but that is the best overall that can be done.
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