Reopening the Discussion on Tax Reform

So welcome to the jungle.” Those are the words of Revenue Secretary Richard Nelson speaking to lawmakers recently about the fiscal challenges that are just around the corner for Louisiana. While he talked about the difficulties of addressing the significant loss of revenue that will come from the expiration of temporary taxes, he also kicked off a discussion about broader tax reforms that could put the state in a more competitive posture. That’s a good conversation to have, but it’s not a new one.

Budget crises often open the door to bigger discussions about the state’s tax structure. That’s what happened a decade ago, when a variety of external and self-inflicted factors caused state revenues to collapse. Out of that came a major tax reform proposal developed for the Committee of 100 by the Tax Foundation in 2015 and a report from the legislatively-created “HCR 11” Task Force in 2017, on which CABL served.

They both said much the same thing: Louisiana’s tax structure is flawed, outdated, and in dire need of modernization.

Enter Secretary Nelson. With a new fiscal cliff coming, he is promoting much the same thing. He believes it’s hard to solve the revenue problem in a truly thoughtful way without taking a comprehensive look at the state’s entire tax structure. Piece meal doesn’t work: “It’s kind of like a giant Jenga puzzle,” he says. “If you pull out one block, the whole thing will fall over.”

Hoping to avoid that, he put forward a series of ideas that borrow from the playbook of those studies from the past.

  • Get rid of unorthodox taxes like the corporate franchise tax and the inventory tax.
  • Reduce individual and corporate income tax rates.
  • Reduce the state sales tax rate.
  • Accomplish all of that by broadening the state sales tax base to include services and digital products and eliminating various exemptions.

That’s the view from 30,000 feet and it’s obviously more complicated and politically fraught than that. But the pillars of this approach are sound and validated by the work and studies that have come before.

Louisiana’s tax exemptions and credits total more than $5 billion, by the Secretary’s account. And our sales tax is geared more toward the old economy which taxes the purchase of tangible goods rather than services and digital products which now represent huge parts of today’s retail economy.

It’s his view that increasing the emphasis on the sales tax and eliminating some of those exemptions and credits would raise enough money to deal with the coming budget shortfall, lower income tax rates, and eliminate some of the other outdated taxes that hurt our competitiveness.

Of course, the devil is in the details, which we don’t know yet. And for every change you make in the tax structure there is a constituency that prefers the status quo – even if those changes move us up in national rankings and create a more fair and mainstream tax system.

But it’s good to have this discussion. The tax approaches the Secretary has outlined are rooted in the work of experts, both within our state and nationally. They may not be enough to get rid of the state income tax as some would like. But they’re ideas that, if enacted properly, could position Louisiana well compared to other states, encourage economic development, and stabilize our revenues in a way that helps us avoid some of the budget shortfalls that continue to plague us.

It would be a long and difficult road to get there, but all the work that has gone before suggests it’s worth another try.

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