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Louisiana lawmakers are in the second special session of the calendar year to once again address significant budget shortfalls—this time for the coming fiscal year starting July 1.
ICYMI, here’s a brief recap of events leading up to this extraordinary session: short-sighted income tax cuts under the Blanco and Jindal administrations followed by stagnating sales tax revenues and declining oil prices left lawmakers facing a $900 million gap in the current fiscal year (ending June 30) and about twice that for the coming fiscal year. Lawmakers were able to most of close the FY 2016 and substantially narrow the FY 2017 gaps during the first special session in March through a mix of spending cuts, one-time fiscal measures, and mostly temporary tax changes—most notably a regressive 1 cent sales tax hike, giving LA the highest combined state and local sales tax rate in the country. While the legislature recently passed a FY 2017 budget, it is still $600 million short.
As the governor stated in his remarks opening the second session, this unresolved fiscal crisis presents Louisiana the opportunity to “get ahead of the game” on reforms they will need to not only fund essential services this year but also to create stability going forward. Not all proposals under consideration will move Louisiana in the right direction—here’s our take on some of the key proposals:
1. Eliminate the federal income tax deduction—but don’t blow the savings on a capped flat tax
The deduction for federal income taxes paid is an unusual personal income tax break that allows taxpayers to subtract the value of the federal income taxes they pay in a given year from their Louisiana taxable income. It is incredibly costly to the state (and expected to balloon as the federal income taxes paid by wealthy tax payers increase) and provides very little benefit to low- and middle-income families. A recent ITEP analysis found that this reform alone would more than close LA’s current budget gap, saving the state over $950 million a year, 83 percent of which would come from households in the top 20 percent of income.
Elimination of this deduction has been proposed as a part of contingent bills HB 7 and HB 17, which would also flatten Louisiana’s personal income tax to a single rate of 3.8 percent (applied starting at $25,000 of taxable income for married couples) and constitutionally cap this rate at 4.75 percent. These bills blow the savings from eliminating the deduction for federal income taxes on a flat tax system that raises no additional revenue to address the current budgetary gap and may even, according to an ITEP analysis, be a revenue loser.
Under the maximum rate set by the proposed cap, we estimate HB 7 and HB 17 would raise $750 million, which would be enough to plug the budgetary gap for the coming year, but $850 million short of what is needed to replace the $1 billion in revenue when the temporary sales tax increase expires in 2018. Given that Louisiana already has the highest combined state and local sales tax rate in the country, limiting the ability of lawmakers to raise needed revenue in the future through the more progressive income tax is terrible tax policy.
2. Make steps toward restoring sensible income tax brackets and rates
In 2003, Louisiana enacted progressive reforms by exempting food and residential utilities from the regressive sales tax and raising the income taxes paid by higher income earners. Lawmakers kept the sales tax changes but repealed the income tax reforms (aka the Stelly Plan) post-Katrina when the state budget was flush with federal recovery dollars, leaving the state short an estimated $1 billion annually once those dollars dried up.
Rather than moving to a flat tax structure, the sensible and fiscally responsible thing for lawmakers to do is to take steps to restore the Stelly income tax brackets, under which the highest marginal rate of 6% applied to income over $50,000 for households married filing jointly (MFJ) ($25,000 if single) rather than $100,000 ($50,000 if single).
ITEP’s analysis found that adoption of the governor’s proposal to change the individual income tax brackets in the first special session (HB 34 which was a modified Stelly bracket applying the top rate to taxable income above $60,000 for MFJ filers) would have raised over $380 million, which is over 60 percent of the revenue needed to close the FY 2017 gap.
3. Reduce the excess itemized deductions on individual income taxes
A proposal to limit the itemized deductions individuals can claim on their state personal income taxes above the federal standard deduction will be given a second chance today in the House Way and Means Committee. The first version of the proposal would have allowed individuals to take 57.5 percent of the deduction instead of 100 percent. The bill is expected to be reintroduced with amendments.
An ITEP analysis of a similar proposal found that reducing excess itemized deductions to 50 percent would bring in $115 million in revenue (20 percent of what is needed to close the FY 2017 gap) and impact fewer than 20 percent of all Louisiana households.
HB 7 and HB 17, mentioned above, would entirely eliminate these deductions, but the estimated $300 million in savings to the state is zeroed out by the problematic capped flat tax structure.
If lawmakers adopted only the second and third of these suggested reforms, they could close more than 80 percent of the budget gap facing the state next year—saving college tuition assistance, low-income hospitals, and other social services from devastating cuts—and would also be making critical steps toward enacting longer-term, more progressive reforms.
Are the days of “patching [the] budget together through duct-tape solutions, maxed out credit cards and misguided fund sweeps” over? They should and can be. Here’s to hoping LA lawmakers will take these steps to move the state in the right direction.