Complex to simple – reform the tax systems

Most readers of the Louisiana tax code agree that it is filled with hundreds of exemptions, loopholes and special interest giveaways. It stands as an impediment to making Louisiana competitive on the world stage. Ironically, the very tax code that can best be described as an antiquated throwback to the days of Gov. Huey Long is actually being defended in ways that seek to stop comprehensive tax reform from happening. In this fragile economic climate, the time has come for the state of Louisiana to overhaul its tax code and change it into something that is simpler, fairer and flatter for every Louisiana citizen.

A state’s tax code is a key indicator of the priorities of that state. While many states boast that higher taxes lead to a larger state budget, many of those same states (Maryland, New York, Michigan) are finding that higher taxes do not equate with economic growth in the private sector. In fact, just the opposite is taking place. Interstate migration has long indicated that people often vote with their feet to places where taxes and regulations are lower. While this has certainly slowed during the recession, there is, in the words of Enrico Moretti, a “new geography of jobs.” New pockets of job growth based on the talent pool of workers find certain cities and states more hospitable to business than others.

While tax rates are not the only indicator of future success in a region (education, workforce development and infrastructure play a vital role as well), tax policy is a first order consideration for corporate relocation and expansion. States where extraordinary amounts of money are required simple to avoid taxes are often taken off any list for consideration even when progress might be taking place across other areas. Louisiana has often lost out to other states simply because its tax code was more of a barrier than a benefit when considering where to located or expand a business.

Some recent studies seem to say that individual taxpayers and small-business owners are obligated to pay higher taxes to subsidize public-sector projects and services, no matter the impact to them personally. A person’s wages for their work belongs to the individual – not the government. Developing a tax structure that frees people to keep more of their money also enhances their ability as taxpayers to save, spend and invest more money according to their personal choices.

Gross state product data reveals that states without personal income tax grew more on average each year than states with personal income tax. To definitively state there is no correlation between personal income tax and GSP is simple to ignore the data or to misrepresent the impact that eliminating personal income tax could bring to a state. To be sure, a state’s tax structure must be built on sound economic principles that reinforce a diversified tax base with low rates for each tax type.

Stability in the state’s tax system should be the goal. Careful examination of the data from the past 40 years shows that sales tax revenues have grown with the economy and remained a stable source of revenue. On the other hand, income tax revenues have been more volatile, producing wide variations in state revenue resulting in poor revenue forecasting. Corporate income taxes are so volatile that the Louisiana Revenue Estimating Conference doesn’t even attempt to predict that longer-term year-to-year fluctuations in corporate income tax revenues. Louisiana is one of the few states in the nation to have both a corporate income tax and a corporate franchise tax. What incentive does any small business or corporation have to invest in this state if it is taxed at every turn?

Louisiana’s economic landscape allows for a strong dependence on sales and severance taxes as the foundation for funding the state’s budget. Job creation, however, in new sectors of research, innovation and technology will only come when tax reforms take root in a state largely known for a complicated tax system that historically has stifled economic growth. The proposals that the Jindal administration releases for consideration by the public and the Legislature are designed to promote job creation and foster economic growth in Louisiana. These policies are the result of months of data analysis and careful research to ensure that the elimination of personal income tax, corporate income tax and corporate franchise tax will only strengthen Louisiana’s advantage in the global market.

EDITOR’S NOTE: Tim Barfield is head of Louisiana Department of Revenue. This column appeared in the March 4 edition of the Baton Rouge Business Report.