Wednesday, June 30, 2010
Written by Gregg Gothreaux

Streamlining government and efforts to limit government to reign in budget shortfalls have not worked because they fail to take on the essential problem — Louisiana’s tax system.

For years, state leadership has wrestled with Louisiana’s budget roller coaster. The story’s no different in the session that ended June 21. With legislators debating whether to tap into the Budget Stabilization Fund, contemplating cuts to higher education and health care, and the disastrous oil spill in the Gulf and subsequent drilling moratorium, the state’s budget has seen better days.  While there’s no magic solution that can remedy our state budget issues, there are measures that can be implemented that, over time, will work to stabilize the state budget and make Louisiana more competitive in the South. “We’ve been on this budget roller coaster as long I’ve been in the Legislature. The players have changed over time, but the problem still exists,” says state Sen. Mike Michot of Lafayette, who chairs the Senate Finance Committee. “The issue is no one will pursue what we’ve pushed for these many years, true fiscal reform. We’ve made some progress, like last year’s passage of relief of capital gains taxes to those entrepreneurs who sell a business and the quality jobs legislation of a few years before. But victories are too few and far between. We find ourselves in a battle generally fighting over how to balance the budget.”

Streamlining government and efforts to limit government to reign in budget shortfalls have not worked for the most part because they fail to take on the essential problem — Louisiana’s tax system. Our tax system is upside down. In Louisiana, we collect taxes locally and distribute them centrally. It would serve us better to model after states that collect centrally and distribute taxes at the local level. This would shift emphasis of the provision of services from state to local governments.

Most people agree that the best form of government is local, that which is closest to the voter. City-Parish President Joey Durel says, “Local government is the most trusted form of government for one obvious reason — the people making decisions for you were all elected to make decisions for the community in which they live. Often state and federal laws are enacted by people who were mostly elected by and live in other communities; therefore, they may not have to live with the consequences. And, of course, they often are not familiar with all of the local issues unique to a community.”

When looking at the local tax system, people often don’t address the root cause of our state’s budget issues — long-term budget stability does not lie in income taxes but in property and sales taxes (vat).

According to the American Legislative Exchange Council’s report, “Rich States, Poor States,” by relying on sales taxes (and property taxes on a local level) rather than on income taxes, government revenue fluctuations, over bad and good times alike, are lower. Local property taxes and sales taxes are more stable and reliable sources of revenue than income taxes. In other words, very little roller coaster effect.

When comparing year over year (July 07-June 08 to July 08-June 09) percent change in tax revenue in Louisiana, sales taxes saw a 4.69 percent decrease (equal with the U.S. average), while personal income and corporate income taxes saw larger decreases. Of the states that have all three taxes, the sales tax component of the total tax revenue saw the smallest decrease, or largest percent increase, in 33 of those 39 states.

The report’s authors also compared the nine states with the lowest and highest marginal personal income tax rates and found that not only did the states without an income tax have more tax revenues, they also outperformed the taxed states in all areas measured (gross state product growth, population growth, non-farm payroll employment growth, gross state product per capita growth, gross state product per employee growth and total state tax receipts growth).

Every tax system has its pluses and minuses, but this report makes a valid case for something I’ve been saying for years: We need to reward success, not discourage it through taxation. The state should eliminate the personal income tax (rewarding success), and a more balanced tax system needs to be in place that supports local government through property and sales taxes. On the state level, we should have a more de-centralized government that supports local government, and our Legislature needs to cease making bills that regulate and hinder local government, and instead work to clean up their own house.

“There is an inordinate amount of time spent at the Legislature by representatives who are trying to control what their local governments do rather than trying to fix our state’s fiscal woes,” Michot says. “There are areas of this state that are at war over local versus state control, and they drag all of the Legislature into it with these bills, and they drag all of us down while we should be taking care of more important state business. I have tried to get them to focus as chair of finance, but they are goaded by certain interest groups to pick on the little guys rather than deal with our issues.”

There has been plenty of demagoguery in the state over the decades that has helped swing public opinion and shape negative stereotypes of Louisiana. As a state, we’ve lost countless opportunities to better our economic outlook. Despite this, even today there are individuals who prey on the emotions and partialities of the citizenry to get their agenda ahead. There are those who preach about streamlining government at the state level while at the same time they wish to limit local government’s opportunity to serve their citizens. These people may mean well, but their attempts to reign in government are thinly veiled to protect the landed gentry which control their livelihood. They know that the most business-friendly and successful states utilize a fair combination of taxes focused on value added tax and property tax. They know that local government is most responsive to business and citizen needs, but they won’t call for the solution. Whether demagogue or not, they protect the status quo by never suggesting the hard, tough choice of true fiscal reform — a choice that would keep our successful entrepreneurs in state. A choice that would cause one to become more engaged in local schools and government leadership.  
Isn’t it time for our state to get off the roller coaster and call a constitutional convention to fix this system?

Gregg Gothreaux is president and chief executive officer of the Lafayette Economic Development Authority.

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