Business of Politics

Louisiana's $7 Billion Money Pit

Wednesday, March 30, 2011

Tax exemptions passed by a simple majority legislative vote can stay on the books forever. That needs to change. By Edward Ashworth

When Gov. Jindal recently released his executive budget for next year, it began the process to determine how the state will spend $8.3 billion it will raise from the taxes we all pay and from other sources. There is, however, another $7 billion the state spends, about which little is known.  That is the state's hidden budget; and it needs some sunshine.
Wednesday, March 30, 2011

Tax exemptions passed by a simple majority legislative vote can stay on the books forever. That needs to change. By Edward Ashworth

When Gov. Jindal recently released his executive budget for next year, it began the process to determine how the state will spend $8.3 billion it will raise from the taxes we all pay and from other sources. There is, however, another $7 billion the state spends, about which little is known.  That is the state's hidden budget; and it needs some sunshine.

This hidden budget is money the state spends not by appropriations but by simply never collecting it in the first place because of more than 440 tax exemptions, credits, deductions and the like that the state has granted over time. Called the Tax Exemption Budget, this tax-code spending - $7.1 billion in Fiscal Year 2010 compared to $7.8 billion in the regular budget - is treated very differently than regular state spending.

Before regular state money can be spent, there is a legislative appropriation process. It includes public hearings before the House Appropriations Committee and the Senate Finance Committee at which lawmakers and the public can be heard; votes in the full House and Senate; and then consideration by the governor, who can veto items he doesn't like.

Tax-code spending faces no such oversight. Once a tax exemption is passed by a simple majority legislative vote, it can be on the books forever, unless it includes an expiration date known as a sunset provision. Only one-third of tax exemptions have expiration dates. Tax exemptions without expiration dates can be repealed by the Legislature, but that takes a difficult-to-get two-thirds vote.
What is this tax-code spending? As the accompanying tables show, it covers myriad areas. Many tax exemptions are supposed to promote economic development, such as $164 million spent yearly on film tax credits, $168 million on two-year severance tax exemptions for horizontally drilled oil and gas wells, or $110 million for enterprise zone tax credits. Others are part of the large-scale overhaul of the state's tax system under Gov. Mike Foster that was known as the Stelly Plan, which reduced or eliminated the state sales taxes on groceries (at a cost of $328 million a year), prescription drugs ($238 million), and residential utilities ($146 million) in exchange for modest increases in personal income taxes, primarily on upper-income taxpayers.
 
In 2007 and 2008, the state repealed the income tax increases in the Stelly plan in what were the largest tax cuts in the history of the state. One of these repeals reinstated the state income tax deduction for excess federal itemized deductions. The cost of this single exemption was $323 million last year.

What do all these tax exemptions have in common? They lack review by the governor, Legislature or anyone else. There is no analysis of whether these exemptions do the job supporters said they would do. This needs to change.

Louisiana is in the third year of a severe shortfall of revenue brought on by the national recession and ill-advised state tax cuts. When every dollar counts, the state needs to account for every dollar. It's not; $7 billion of tax-code spending flies under the radar. And it matters.

The graph below compares how much the state would receive annually if these exemptions were gone. Keep in mind that these are exemptions from taxes already enacted, not proposals for new taxes. Louisiana loses $1.3 billion a year through loopholes in the corporate income and franchise taxes, according to the Department of Revenue. That is more than 75 percent of what these existing taxes would bring in absent the exemptions.

In the sales tax area, almost $4 billion leaks through exemptions. That's more than 60 percent of what would be raised otherwise. The loss on the individual income side is in excess of $1 billion, or 32 percent.

That isn't to say all tax exemptions are bad. Like beauty, the value of any given exemption is often in the eye of the beholder. The sales tax exemption for groceries and prescription drugs makes a lot of sense, for example. But others are indefensible. The two-year exemption from severance taxes for horizontal oil and gas wells is one example. It was enacted when the oil and gas industry was in a downturn and horizontal drilling was new technology. Today the oil and gas industry makes robust profits, and horizontal drilling is common. If the exemption was ever needed as an incentive to drill, it isn't anymore.

We pay a high price - $168 million last year - for this one exemption. Louisiana is home to one of the largest discoveries of natural gas in U.S. history - the Haynesville Shale. Companies have been in a frenzy to lease land there to drill. But, because of this exemption, the state will lose over 80 percent of the revenue from this potential bonanza, according to published reports citing the chief economist at the Legislative Fiscal Office.

There is some hope for reform. In the last legislative session, the Legislature passed two measures calling for more scrutiny of tax exemptions, HCR 187 by Rep. Michael Jackson and SB 706 by Sen. Lydia Jackson. But to date, nothing more has been done. It is past time to bring this $7 billion of tax-code spending out of the closet and into the sunshine.

Edward Ashworth is director of the Louisiana Budget Project, which provides independent, nonpartisan research and analysis of Louisiana fiscal issues and their impact on low- and moderate-income residents.