Last Thursday was crunch time for the Louisiana House of Representatives as it began to chip away at the $1.6 billion deficit, which threatens higher education and health care.
Although the House did what had to be done and raised over $600 million in revenue, none of its actions affected average working families, unless you smoke. The House did pass a modest increase in the tobacco tax (36 cents), which made Louisiana comparable with neighboring states. In addition, the increase was dedicated strictly to health care and receives a two to one match from federal funds. An added benefit is that increasing the tobacco tax also lowers long term health care costs.
The other revenue items passed are considered to be primarily “tax expenditures” because they are specially directed tax breaks, which benefit business and are similar to direct expenditures. Both tax expenditures and direct expenditures are considered as alternative means of accomplishing similar budget policy objectives, in this case helping to expand certain business activities. Some experts have suggested that Louisiana has become a bit too generous with tax breaks in recent years. Consider that during the period from 2009-2014, corporate tax breaks increased by $1.2 billion or 32% and the budget decreased by $847 million or 9%. (For a short video on the state budget, please click here Louisiana Fiscal Crisis 2015)
After six years of cutting, it becomes pretty obvious that higher education and health care (the only areas of the state budget which are not constitutionally protected) cannot suffer more reductions without doing some real harm to the Louisiana residents that members of the legislature took an oath to serve and protect. I think we all agree that the state needs to offer a safety net for those suffering challenges, generally through no fault of their own. In my area, I have listened to emotional pleas from the parents of special needs children and the importance of pediatric daycare facilities to help return some normalcy to their lives, and also to allow them to work. All of the “Do Good” family programs and medical providers in the state that so many depend on have been cut and are already struggling to serve those who require services.
State funding for higher education has decreased 68% in the last six years. Colleges have been forced to raise their tuition while cutting back on course offerings and services. Don’t we want to be able to properly educate our children and keep them in Louisiana?
As I said earlier, the House of Representatives did what had to be done to help offset further disastrous cuts. The measures which passed last Thursday included:
1) Modifying the horizontal oil and gas well drilling exemption to begin phasing out once oil prices rise above $70 per barrel. This exemption was enacted many years ago when horizontal drilling was more experimental and required tax incentives to further new development. Now the technology for fracking is well established and its activity is closely related to the price of oil.
2) Modifying the solar energy system credit to substantially limit benefits to the companies, which lease a system to a third party. The major issues with the program stemmed from the larger leasing companies abuse of program benefits.
3) Capping Louisiana’s film tax credit at $200 million and changing the programs to encourage a home grown industry that generates a better economic return for the state.
4) Reducing by 25% the refundable portion of the state tax credit that businesses receive for paying local inventory tax. Companies are still able to offset all of their state tax liability with the inventory tax credit, collect 75% of the refundable portion and roll the remaining 25% of the refundable portion to subsequent years. These companies can certainly live with that.
5) Eliminating carrybacks but extending carryforwards of net operating losses. Unlike individuals, businesses can carry forward their losses for 10 years to offset tax liability and may also carry them back for 3 years. For example, a company which experiences a loss in the current year can offset it against the earnings of a previous year (carryback), and claim an instant refund from earlier tax payments. The issue with carrybacks is that they require the state to make an unexpected payment in the current year, while carryforwards smooth out the losses by having them applied to future income as opposed to requiring an immediate payment.
6) Suspending for one year, 1 cent of the 4 cent sales tax exemption for utility payments by businesses. This energy cost sales tax exemption was enacted during a time when energy costs were high and businesses which depended on energy as a feedstock requested some relief. Now that energy prices are low, the exemption is not as critical for those companies who are large energy users.
7) Revising the tax credit for taxes paid in other states and requiring that the other state provide a similar credit as Louisiana. The credit shall be limited to the lesser of the proportional credit limitation amount (based on Louisiana’s structure or the actual tax paid to the other state).
8) The final series of bills provided an across the board 20% reduction in tax breaks, primarily for businesses, and included exclusions, exemptions, credits and rebates.
In total, the revenue increases left the average family alone, were targeted at tax breaks considered a bit generous and didn’t disproportionately affect a particular business or industry. Under the circumstances, the House of Representatives rose to the challenge of protecting vital services for Louisiana families.