Jindal plan cost La. revenues

By Christopher Tidmore
Contributing Writer

The Public Affairs Research Council released its analysis for the governor’s income-sales tax swap late Thursday. While it backed up Bobby Jindal’s contention that keeping the Earned Income Tax Credit will keep the higher goods and services taxes from over-harming the working poor, the non-profit, good government group strongly disagreed that the 1.88 cent hike would provide enough funds for revenue neutrality.

As the PAR study explained, “The administration uses a figure of $2.4 billion as the cost of eliminating the personal income tax. This figure is based on taxes collected in fiscal year 2010-2011, which was two years ago when the state was recovering from a national recession. A more relevant number would reflect a realistic estimation of the tax expected in the next year or two as the tax reform is being implemented. That figure would be approximately $2.7 billion.”

“Likewise, the administration uses a figure of $262 million to account for the elimination of the corporate income and franchise taxes, based on 2010-2011. The administration’s economist expects $340 million in these taxes next fiscal year. Two years ago, the state jobless rate was 7.9 percent. Continued unemployment insurance claims were approximately 60,000 in 2010 and about 45,000 two years ago. Matters have improved since then. Currently, the jobless rate in Louisiana is below 6 percent and continued unemployment insurance claims are down to about 28,000, almost at pre-recession levels.”

“In sum, the use of income tax figures that were depressed by the economic downturn two years ago, as opposed to the trend of recovery and higher revenues that the state is experiencing currently, can result in the plan not being revenue neutral. The tax reform estimates should look toward the future, not the past. In fact that is the approach taken by the Ernst & Young analysts hired by the administration when they figured the new revenue that would be generated by expanding the sales tax base under the governor’s plan. They used the state Revenue Estimating Conference’s latest forecast for future years’ sales tax activity as a base to derive their estimates.”

“The use of the lower figures of the past to count the costs of the proposal and the higher figures of the future to count the benefits will lead to problems in reconciling the numbers. A further look is warranted at the other side of the ledger for those figures representing new revenue from expanded taxes or reduced exemptions. These figures need careful attention to gauge whether they are dependable. Inflated expectations of new revenues could create the appearance of a balanced tax plan, but such figuring would not give the state a real revenue-neutral tax reform. Here are a couple of likely examples.”

“The cigarette tax figure. The administration may be using an optimistic figure for the revenue gain from an increased cigarette tax. The expectation is that a $1.05 per-pack increase in the cigarette excise tax will reap an additional $277 million annually for the state. Of the estimates of a cigarette tax increase calculated by the Legislative Fiscal Office over the years, none has foreseen a revenue gain of that amount. The closest example is a Fiscal Office estimate of a $189 million state revenue gain from a $1 increase in the cigarette tax.”

“The severance tax figure. The administration wants to reduce exemptions on natural resource extraction taxes in order to create more state revenue to offset the elimination of income taxes. Care should be taken in estimating how much exemption value will be available to the state in the near future, particularly for the horizontal drilling tax break, which is the biggest of the severance tax exemptions. The state offers a severance exemption for deep shale gas mining for up to 24 months or until the cost of the drilling project is covered. This exemption provided a state tax break of about $264 million last year following the 2010-2011 drilling boom at the Haynesville Shale. With natural gas prices dropping to low levels, companies have scaled back their drilling operations. Meanwhile, many of the natural gas wells are surpassing the 24-month window for the tax exemption. So, even if the horizontal drilling exemption were reduced or eliminated, the state in the next couple of years, and perhaps beyond, would not realize an exemption value of $264 million. Recent industry studies project gas prices will remain low for the foreseeable future, which will depress drilling rig deployment and greatly lower the value of the horizontal drilling exemption.

“Administration and industry officials are in discussions about how severance tax exemptions might be reduced. Whatever the result of those talks, the administration in its calculations should use a verifiable amount of the state savings from any reduction. The administration’s current calculation of $289 million in new revenues from reduced exemptions may be unsustainable.”

“Based on all these observations, the administration’s tax swap plan could be $500 million to $650 million short of being revenue neutral, assuming that all of the other figures in its cost/revenue list are close to being accurate. As this discussion of tax reform begins, lawmakers, government leaders and staff, the media and the public must insist on objective and realistic assumptions about the costs and gains of each proposal on the table.”

The PAR study made no mention of another rising question of the tax plan. Would the sales tax apply to corporate work, billed by firms in other states, but done by personnel in Louisiana. With the loss of personal income taxes from workers at companies that currently pay no corporate rate, would that cause a net loss of revenue from the state. And, were the professional services billed out of state, would the Louisiana Department of Revenue have a recourse to collect sales taxes—any more than there is a legal ability to collect such sums off of out-of-state internet purchases.

This article originally published in the March 25, 2013 print edition of The Louisiana Weekly newspaper.