Can a Jindal tax be Edwards’ only option
8th February 2016 · 0 Comments
By Christopher Tidmore
Contributing Writer
Governor John Bel Edwards has a twofold problem, and their names are Cameron Henry and Neil Abramson.
The State Representatives received the consolation prizes of Chairmen of the Louisiana House Appropriations and Ways and Means Committees when each withdrew from the Speaker’s Race and voted for Republican Rep. Taylor Barras, insuring the defeat of Edwards’ choice Democrat Rep. Walt Leger III.
Moreover, Barras stacked these two committees with supermajorities of Republicans skeptical of the new governor’s tax-raising agenda.
All spending in taxation bills must originate in the state house, and those GOP ratios mean Gov. Edwards’ tax proposals are effectively dead on arrival in the Special Session starting February 14.
Both Henry and Abramson have indicated that their supermajority conservative committees will not permanently raise taxes to deal with this year’s $750 million deficit, much less next year’s, without long-term equivalent budgetary and tax cutting reforms.
Edwards, in other words, may need to agree to long-term tax cuts in exchange for the passage of massive short-term hikes through the House. Unusual though, since the new governor has already embraced regressive sales tax increases in his budget, there may be the potential for a compromise – which ironically would look similar to Bobby Jindal’s notion: trade sales taxes for income taxes.
The Problem
With deficits of $750 million this fiscal year and $1.9 billion running into 2017, the Louisiana Legislature cannot cut spending fast enough to plug the hole. Put another way, if the legislature chose to defund the entire state contribution to higher education that would only amount to $700 million per year. Even many Republicans acknowledge that extra revenues are needed, at least in the short term.
At a press conference on January 19, 2016, Gov. John Bel Edwards proposed a series of tax increases to plug the hole, including a one-cent increase in the state sales tax that would apply to all purchases, including food and utilities. The 25% increase in the state sales tax would tax effect April 1, generating $216 million in revenues.
The Governor seeks to increase cigarette taxes by 22-cents per pack, boost business utility and phone taxes, as well as tap the rainy day fund and the BP settlement. He also wishes to repurpose 10% of the state’s dedicated discretionary funds—depository accounts where corporations or citizens pay to cover particular government services—and utilize those funds to balance the budget.
As Bobby Jindal proposed and failed to get his GOP legislature to consider, Edwards has put forward a plan to drastically reduce the State Inventory Tax Credit, which would cause massive tax increases on warehousing goods in parishes heavily reliant on distribution industries, like Jefferson and Orleans. (Parish Governments declared ‘war’ when Jindal tried to phase the credit out two years ago.)
The new Democratic Governor also wants to hike business utility sales taxes (massively affecting the chemical refining industry), expand the corporate franchise tax to LLCs (a tax that only six states levy), and cut “loss” deductions in the corporate income tax. Each would make Edwards the mortal enemy of L.A.B.I. and the Louisiana Chemical Association, the two most powerful lobbies in Baton Rouge.
He wants to raise Louisiana’s $2.50-per-gallon tax on liquor and 11-cents-per-gallon tax on wine. These taxes may fall below the national averages, but the Alcohol lobby has blocked every attempt to boost these taxes in recent memory. It is not an accident that the tax on beer has not increased practically since the 1950s.
Edwards’ calls to remove sales tax rebates for convenience stores and insurance premiums managed to put him in the crosshairs of the other two powerful groups of lobbyists. Only the proposed 22-cent boost in cigarette taxes is the most politically palatable proposal the Governor made, yet it would produce—at most–$75 million in the last three months, too small an increase by itself to save the day.
Long term, the new Governor seeks elimination of federal deductions in the state tax code, restoring some of the rates under the repealed Stelly Plan. Though, at the Press Conference, he did hold out the possibility of lowering tax rates if these deductions were eliminated. Louisiana’s main fiscal prognosticator, the Revenue Estimating Confer-ence’s Dr. James Richardson, floated the concept of restoring the Stelly Plan’s rates of income tax, which he said, “would increase withholding on people’s payroll checks …generat[ing] money fairly quickly.”
However, considering that much of the current legislature, including the new Governor, voted for the repeal of the Stelly rates after a bipartisan howl of outrage from middle-class voters—who carried the brunt of the tax increases—such a suggestion remains both politically toxic and likely dead-on-arrival despite Edwards’ embrace of the idea.
As for reducing the sales tax exemptions on food, utilities, prescription drugs, and other areas as Edwards proposed in his one-cent hike drew opposition from Democrats as well. Progressives — and particularly the LA Legislative Black Caucus—fought for years to remove the impact of these sales taxes on the necessities of life. For John Bel Edwards to convince his strongest Democratic legislative allies to support this would be hard enough, especially amidst GOP opposition. (Edwin Edwards barely managed it at a time when Louisiana had a Democratic Majority House and Senate.)
Boosting The Sales Tax
What has become immediately obvious in recent weeks is the only tax suggested by John Bel Edwards of sufficient size to plug the hole in the deficit in the short-term and receive two-thirds majorities of the GOP House is a sales tax. However, it would take a much bigger hike then the one suggested by the Edwards Administration to fill $750 million in three months if most of the other tax increases are off the table.
With the increasing discomfort of the Black Caucus at the idea of taxing food, utilities, and prescription drugs, Edwards could lose key Democratic votes if he includes those “necessities of life” in his tax increases—maybe even enough votes to kill any two-thirds majority needed to hike taxes under the State Constitution.
Without taxing food, the amount that the legislature would have to increase sales taxes is suspiciously similar to the sales tax hike/swap proposed by Bobby Jindal two years ago — 2.5 cents on the dollar.
Such a hike, excluding food, utilities, etc., would produce $1.875 billion over a year, or $468 million in just three months. A $.025 also presents a political problem for John Bel Edwards, who loudly opposed the idea of hiking sales taxes to eliminate all income taxes.
Yet, to quote the ancient Vulcan proverb, “Only Nixon could go to China.” Only a Democrat could take this step. Perhaps the problem may be that he did not go far enough, for this may be his only chance of a tax increase through a Republican House.
Jindal’s proposal two years ago would have left the state with just under a billion-dollar deficit, even if politically popular tax breaks like the film credit were eliminated. For that reason, most Republicans opposed the swap, not just Edwards and the Democrats.
If the new Governor’s fellow Democrats balk at taxing food and utilities though, Edwards—as a fall back—could embrace the Jindal Plan, that did NOT include those taxes on the necessities of life. And, having indicated that he would embrace over all tax reform as part of his plan, Governor Edwards could use sales taxes to that end, a much more politically attractive idea to most Republicans than raising income taxes.
In other words, what if the 2.5 cents were used to both plug a deficit AND drastically reduce some income taxes over time? What if it bought Louisiana budget time, saving drastic cuts this year that might be irreparable?
Match African-American opposition to food taxes with the fact that most Republicans are resistant to any tax increases, and gridlock ensues, unless Edwards approaches this sales tax increase strategically from the Right.
Cloak any argument in the fact that Jindal had a point; Louisiana sits between Texas and Louisiana. Retirees often opt for these other Sunbelt states over us due to the absence on an income tax. Louisiana’s high corporate and franchise taxes also discourage business development. And Billionaires do not want to live here because there is no “cap” on the income tax, costing the state sales and property taxes that otherwise goes to Texas and Florida.
The Governor could then add that Jindal was too ambitious. Destroying the film industry and putting a huge inventory tax burden on parishes, while embroiling Louisiana in deeper deficits, traded one problem for another.
Instead, to swing reluctant GOP members to his side, John Bel Edwards could propose to increase the tax by 2.5 cents immediately, and then phase out income taxes on retirees, and the corporate income and franchise taxes over the next four years. Perhaps even ‘cap’ the maximum amount that the state could receive in taxes from any individual to $30,000 per person. A cap at that sum, economists say, would have almost no fiscal cost to the state, as we have few billionaires. That might both encourage the return of very rich expatriates to the Pelican State and encourage taxophobic Republicans to back the sales tax increases.
The cost of those tax cuts, which amount to $250 million (for those over 60) and $900 million respectively, amount to $1.15 billion, or two-thirds of the amount of the sales tax increase. That leaves a real permanent increase in taxes of over 80 percent of the amount that the Stelly Plan repeal cost the state in permanent structural deficits, and still eliminates two tax areas that economists say disadvantages Louisiana in comparison to her neighbors.
But, the better news is that those repeals would come gradually, over the next four—or perhaps eight—years. Edwards would be able to plug the deficit in this fiscal year, and the vast majority for next year with a $.025 hike. Unlike his one-cent increase, this would not be stopgap measure. The 2.5 cent increase on all areas outside of food, utilities, and prescription drugs would provide the new governor and legislature with enough money to plug next year’s deficit, and could buy each the time to restructure the budget, removing the dedications and cutting expenditures with scalpel, not a bludgeon.
The question remains whether John Bel Edwards would embrace the unorthodox strategy of turning a Jindal concept to his own ends, especially as Louisiana would tie Chicago for the highest sales tax in the nation. It would require a man used to knowing his limits, and using his opponents desires to overcome them.
Often, his staff has complained, Edwards’ virtue can also be a vice. The same man who refused to believe critics who said “a Democrat could not win,” and ‘could never raise $2 million to run’, ended up being the same Governor who refused to embrace a Republican candidate for Speaker of the House.
Edwards’ aides begged him to pick a Republican, ANY Republican, knowing that Walt Leger III lacked the votes, and the Governor’s power in the State House would be subsequently impacted from such a public defeat. Edwards believed, though, he would win on his terms, always, so he suffered a major loss over Leger losing to Barras. In doing so, Edwards ended up with Abramson and Henry commanding committees capable of killing his budget.
Courting Republicans to achieve a Democratic end did not prove his strong suit, yet perhaps experience teaches—especially when it may be your only chance to get any tax increases through a Republican House.
This article originally published in the February 8, 2016 print edition of The Louisiana Weekly newspaper.
