New Group to Study Old Issue – Taxes and Spending

The packet given to members at the first meeting of the Task Force on Structural Changes in Budget and Tax Policy said a lot. Each person got a thick accordion-style pocket folder containing three somewhat recent reports on Louisiana budget and tax policy.  It all but screamed, “been there, done that!”

But times change, circumstances change and the political needs of policy makers change. So yet another new task force/committee/commission, or whatever you want to call it has been empaneled by the Legislature to do another study of better practices in state fiscal policy. CABL serves on this one as it did on the last big legislative budget study, the Commission on Streamlining Government, and we hope this one can yield some positive results just as the last one did.

The good news is that as the plethora of past reports indicates, a lot of work has already been done on all of these issues. That means we’re not starting from scratch and we already know what some of the likely recommendations will be because they’ve already been made.

There’s also good news in the fact that in many ways Louisiana is already doing a pretty good job in some of its budget and spending practices. For instance the national think tank Center on Budget and Policy Prioritiesmakes a number of recommendations about best practices in budgeting. While Louisiana isn’t perfect, it’s one of only five states that meet all three of the organization’s policy criteria for smart budgeting: multi-year forecasts, consensus forecasts, and attention not only to revenue but also baseline spending.

It should be pointed out that it’s not really an oxymoron that Louisiana actually has some good spending and budgeting policies while at the same time we have some of the worst budget issues in the nation. There’s a lesson there and that is that good policies can help you avoid some bad times, but they don’t make up for ignoring the warning signs those policies send you and then making bad decisions.

There is, of course, a negative side to things, too, and that is that over time we have made a mess of our tax structure and there are examples that bear that out. According to figures from the Department of Revenue, when you consider our major sources of taxation we have more than $15 billion in taxes on the books. But out of that $15 billion we only collect about $7.5 billion because we have more than $8 billion in various tax exemptions.

Leaving the argument of too many exemptions aside for a moment, what this essentially says is that we have designed a tax system that basically raises somewhere in the neighborhood of $7.5 billion through a structure that levies more than $15 billion in taxes and then exempts half of that. That doesn’t make good sense.

Here’s why. For argument’s sake let’s just assume we don’t really want to raise the full $15 billion – let’s say we want our tax system to raise $10 billion. Then if that’s the case, we ought to design a tax structure that has about $10 billion of taxes on the books and removes that extra $5 billion. That simplifies the tax code, allows you to lower tax rates, is more transparent, and creates a better tax environment for both individuals and businesses.

Another example can be taken from the Washington D.C.-based Tax Foundation which has done a lot of recent work in Louisiana. In their report Louisiana Fiscal Reform: A Framework for the Future they make a number of interesting points. They identify Louisiana as a state with one of the lowest tax burdens in the country, ranked 45th overall, but they argue we have serious problems elsewhere:

Even though Louisiana has a competitive tax burden, its tax structure leaves much to be desired, ranking toward the bottom of the pack at 35th nationally. The most poorly ranked element of the state’s tax system is the sales tax component, which ranks 50th in the country, chiefly due to its high rate and multiple parallel local sales tax bases.

This actually makes two major points. One is that low taxes don’t necessarily translate into a strong or competitive tax climate. In Louisiana’s case, in fact, it clearly doesn’t. The other is that we had problems with our sales tax well before the recent special session. Since that Tax Foundation report was released, we now have a sales tax that’s risen even higher and a sales tax base that we made even more complicated and confusing than it already was.

The point is that these are all things that can be fixed and hopefully this latest tax force can be a catalyst for that improvement. Louisiana as a state has to decide what level of services it wants to provide citizens, what the quality of those services should be, and how much money it costs to deliver the desired outcomes. Those are issues that are yet to be resolved.

But assuming they are, there’s also a decision to be made about how we collect the money that we raise. Clearly we do so now in a way that is not particularly friendly to taxpayers and makes us less competitive with other states – even those who have higher taxes than we do.

What that means at the end of the day is now more than ever our state leaders need to act like leaders. They need to be honest with the public and tell people where our state stands and how much money we realistically need to deliver the things we say we want delivered. If there’s something we’re doing that we don’t need to do, we should stop. If our spending policies are flawed, we should change them. And if we’re giving away too much money, we should cut back.

But once we do all those things and we figure out how much money the state really does need, we have to have another conversation about how we collect it. Yes, all of this is politically hard and probably personally painful, but if we care about our state, want to see it improve and hope that it will be a decent place for our children to stay and live, we need to act sooner rather than later on all of this.

We’ve certainly created a mess of things, but there’s one thing you can say for a mess – usually if you make it you can also find a way of cleaning it up. Louisiana needs to get cleaning.

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