Increased economic activity would swell the state coffers through other avenues

While some can’t move beyond simplistic platitudes concerning the issue, whether to eliminate personal and corporate income taxes in Louisiana deserves a serious, analytical response. In fact, given other changes, the former is a reasonable goal in the near future, and the latter can be realized in the present.

For fiscalyear 2009-10, the state reported $2.24 billion in collections for the individual income tax and $435 million for the corporate income tax. Note that in just two years the former fell about a billion dollars, and the other over a quarter billion. State government did not bolt and padlock its doors in the interim, thereby demonstrating that large cuts can be made without any significant reductions in the level and quality of service. As such, “replacing” revenues “lost” by termination of these taxes need not be a policy outcome of the change, but let’s assume this in the analysis going forward.

The corporate tax figure certainly is in reach almost immediately, although structural changes needed would have to happen over the next year so this could go into effect starting Jul. 1, 2012.

Where to save dollars

First, the Legislature could adjustthereimbursementmethodologyfornursinghomes. By bringing them in line with other states’ standards, it would save about $100 million. Second, it could eliminate completely appropriations for “member amendments,” or earmarks, saving another $35 million or so. Third, it could changethewaythestateleviesandadministersthestatesalestax, with its many current exemptions, in order to boost collections by $300 million.

Implement these three changes by the end of fiscal year 2011-12, and that makes up the entire loss.

Reducing the individual tax figure to zero will take years and several tactics, but it should not be dismissed out of hand. Cooperation between the State Civil Service Commission, in passing a pay raise plan for classified employees that tiesmerittoperformance, would reduce the amount of money given out as raises from four to two percent on average. Given 2009-10 figures, that would save $31 million.

The Legislature and governor could cut 5,000 jobs (assuming the current full-time equivalent ratio of two classified to one unclassified post, and including the forgone salary increase above as those jobs no longer would exist) from state government and save an additional $250 million. Given the small spans of control in state government indicating too many bureaucratic layers and high rate of state employees per capita, over the span of a year this could be accomplished with little difficulty.

Also, the state needs to get rid of its economically inefficient earned income tax credit, which gives money to tax filing households with an earner who pays no income tax, which would save around another $45 million. Reviewing again the nursing home payment methodology, the state pays about $23 millionforemptybeds; eliminate that subsidy. Combine with the figures above, and now it’s up to nearly $350 million more, and there are additional policy changes that would continue to push that number higher tens of millions of dollars at a time.

Freeing up funds already available

However, the most significant maneuver to fill in the gap would come not from programmatic and policy changes, but from changing the way in which the state allocates its other revenue collections. Presently, with so much (about 71 percent) of its proportion of revenues dedicated, the straitjacket on the uses of money allows huge balances to collect in hundreds of funds – some necessary reserves, but a significant portion unlikely ever to be used for their putative purposes.

This has led to the practice of these “one–time” funds being reallocated on a piecemeal basis to fill budgetary gaps. By reforming the system to give appropriators much more flexibility in funds usage, these dollars initially can be directed to higher-priority uses, increasing the revenues on hand annually. This could free up hundreds of millions a year to balance out no personal income tax revenues.

Remember the economic upside

Finally, note that static analysis has been used here. In reality, economic activity set off by the elimination of these would swell the state coffers by other means through other avenues, principally in the state’s biggest source of its own collections, the sales tax. Thus, the “loss” of $2.675 billion yearly actually would not be nearly this much.

With little disruption Louisiana could wipe out its corporate income tax in a little over a year. With some planning, in not much more time the same could happen for personal income taxes. Even reductions of their rates, say to a flat two percent for both without any exemptions, would be a help and could be done quickly without waiting on the more complicated and extensive reforms mentioned above. As such, creating an imperative to get policy-makers thinking along these lines by advancing legislation to do away with both taxes is responsible and does the state a service.

Jeffrey Sadow is an associate professor of political science at Louisiana State University, Shreveport. The original version of this article first appeared on Sadow’s blog, “Between the Lines.” You can also follow him on twitter.