State of the State: Louisiana

Louisiana Governor John Bel Edwards highlighted the “success” of the Medicaid expansion, foster care improvements, budget reforms, and business investment growth during his second State of the State address; but most of his speech consisted of yet another pitch for spending hikes and massive tax increases. The governor boasted that “nearly 417,000 individuals have received health coverage through Medicaid expansion” and claimed “Louisiana is projected to save nearly $200 million in the first year alone.” But these “savings” could prove temporary if the federal government rolls back its infusion of dollars under Obamacare, potentially leaving Louisiana on the hook for hundreds of millions of dollars in health care entitlement spending. Ironically, these “savings” are not really savings at all, as this move merely shifts the burden to federal taxpayers, many of whom live in Louisiana. This fiscal risk comes on top of the state’s nearly $1.3 billion budget hole.

The governor also touted the “$21 billion in capital investments made in Louisiana over the past year” incentivized by the Industrial Tax Exemption Program (ITEP). Unfortunately, preferential giveaways to a favored few result in higher tax rates for everyone else. Instead of redistributing wealth through the tax code, focus should be placed on attaining a tax burden with as low of a rate and broad of a base as possible.

The lack of a climate for economic growth in the Pelican State is evidenced by the 33,400 drop in total non-farm employment between December 2013 and December 2016. With a dearth of opportunities, it’s no surprise that on net 22,350 people left Louisiana for other states between April 2010 and July 2016.

The governor disguised a massive tax hike proposal with some features of needed income tax reform.  “I am asking you all to give 90 percent of the citizens of Louisiana an income tax cut, and simplify the corporate tax structure,” he pleaded. Indeed, these taxes on productivity and capital hamper investment and growth. But while reducing tax burdens for most individuals, the plan gets rid of the deductibility of federal income taxes. The proposed broadening of the base by eliminating deductions, consolidation of the corporate income brackets, and the reduction of the sales tax by one fifth are welcomed proposals. However, the pro-growth effects of these reforms are likely more than offset by the economically damaging proposed commercial activity tax. This proposed tax would be levied at a rate of 0.35 percent on total gross receipts on any business with total sales of $1.5 million or higher, or a fixed-dollar assessment in proportion to the business’ total receipts if below $1.5 million.

Gross receipts taxes are levied on all sales by the firm and to the firm, adding layer upon layer of taxation at each stage of production.  This “tax pyramiding” is especially harmful to industries that have longer cycles, such as manufacturing and consumer retail. In addition to harming businesses, consumers must pay higher prices for finished goods and services, while workers face lower wages.

Governor Edwards also announced his support for a bill that would raise the state’s minimum wage to $8.50 by 2019.

Louisiana has experienced 15 mid-year deficits over just the past nine years, necessitating multiple extraordinary legislative sessions to bridge the gaps. But expanding the tax burden will not spur economic recovery in the Pelican State. Instead, lawmakers should pursue true broad-based tax reform (similar to that achieved by neighboring Mississippi) and priority-based budgeting focused on performance outcomes. Pro-growth reforms are even more pressing given Louisiana’s regional competitors of Texas, Arkansas, and Mississippi, all of which have enacted substantial tax relief in the last several years. The largest tax reform effort in Mississippi history provided nearly $450 million in tax relief over the next decade for its residents, while Arkansas gave some $100 million back to taxpayers. Texas, which already has one of the fastest-growing economies in the nation, recently jumped to 9th in economic outlook for this year’s edition of the Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index. With more attractive business climates in every nearby state, without urgent reform, businesses and residents in Louisiana will continue to jump ship for smoother waters. Louisiana’s Task Force on Structural Changes in Budget & Tax Policy has recommended numerous such reforms; the next move is up to Governor Edwards.