In preparation for this moment, the Task Force on Structural Changes in Budget and Tax Policy was created by House Concurrent Resolution 11 in the first special session in March 2016 and given a broad mission to study and recommend changes to the state’s tax laws as well as the structure and design of the state budget.
Beginning in March, the HCR11 Task Force held many meetings from the spring to the fall. The Legislature received the final report and recommendations on November 1, 2016. While the report makes a handful of recommendations related to the state budget, the overwhelming majority of the time and focus of the Task Force was to raise more revenue and revamp the state tax code.
On state SPENDING, the Task Force made generalized recommendations such as avoiding budget practices that allow spending beyond the available recurring revenue and reworking some subsidies to local government by replacing it with some authority to raise additional local revenue. The Task Force also suggested staggered sunset dates on non-constitutional dedications and stabilizing the budget from surges in mineral or corporate income tax revenue.
On the SALES TAX, the Task Force recommended reducing the rate back to four percent, authorizing local rate increases by local vote and expanding an aligned state and local government base. They also recommended developing a uniform system of tax administration, collection, and auditing; a state sales tax on non-residential utilities and manufacturing machinery and equipment(with a newly created rebate); and the permanent repeal of various exemptions that were temporarily removed in the 2016 sessions.
On PROPERTY TAX, the Task Force suggested maintaining the homestead exemption at the current level; reworking the industrial tax exemption; phasing-out of the inventory tax over ten years with a simultaneous five-year phase-out of the inventory tax credit; phasing-out the ad valorem tax credit for natural gas over five years; and maintaining the ad valorem tax credit for offshore vessels and for telephone company property.
On CORPORATE INCOME AND FRANCHISE TAX, the Task Force acknowledged the many changes made in 2015 and 2016, that are now in the implementation phase, such as changes to the credit for taxes paid in other states, a new apportionment formula, and an add-back law that is now in the rule-making process. Other sizeable suggestions included a restoration of the full carry-forward of the Net Operating Loss deduction; a study to restructure, phase-out, or eliminate the franchise tax; and sunsets or major changes to many of the Louisiana Economic Development tax credit and rebate incentives.
On INDIVIDUAL INCOME TAX, the Task Force recommended expanding the income tax base by eliminating most exemptions, compressing the tax brackets, and potentially lowering the rate if the broader plan is approved by voters.
The full report by the HCR11 Task Force can be found at www.ldr.louisiana.gov.
The Task Force had the stated objective to design a revenue system that is fair, simple, competitive with other states. They also clearly were given the less public mission to raise $12.5 billion in taxes, licenses, and fees for the budget. While we are told this would help stop the chronic budget deficits Louisiana has faced for generations, it appears more likely that Louisiana’s history of government shortfalls will never be solved by focusing primarily on tax changes. Robust reform of spending and budget structure must be the primary driver of any serious plan.
Based on current five-year projections, the spending rate in state government will continue to grow between three and four percent annually. It is doubtful that the recommendations of the Task Force will grow at that same rate, leaving us in the same cyclical deficit posture going forward. Considering the state budget grew by nearly $3 billion this year but deficits still dominate public discourse, a heavy tax approach is clearly ineffective for government and toxic for our economy.
Getting the long-term solution right is critical as the Louisiana economy struggles through a recession. A predictable and stable tax climate and state budget are in the best interest of both the public and the private sector. In 2017, any successful comprehensive tax reform effort must acknowledge the necessity for job growth and be partnered with comprehensive budget reform with fewer dedications, scrutinized spending, and better prioritization of limited dollars.
This report is just the opening salvo of an economic and budget debate that will take many twists and turns in the months ahead. The elections are over. The moment is here. It’s time to get to work.