It won’t be easy.
That was the clear takeaway from a legislative committee hearing Wednesday where Revenue Secretary Richard Nelson began the public effort of trying to sell a tax plan which Gov. Jeff Landry hopes state lawmakers will approve during a special session that he wants to call in November.
While Nelson gave his testimony, watching him in the hearing room were about 25 lobbyists for special interests that have proven adept over the years at protecting tax breaks he wants to eliminate or reduce.
Nelson and Landry would like legislators to collapse Louisiana’s graduated income tax structure into a single flat rate both for corporate and individual taxes. He believes that would make Louisiana a more attractive place to live and invest in, especially compared to other Southern states.
No one at the hearing raised objections about that proposed change.
It would be a popular move, giving a tax cut to virtually all taxpayers, as described by Nelson to members of the House Ways and Means and Senate Revenue & Fiscal Affairs committees at the Capitol.
But paying for the tax cut would require legislators to take unpopular moves to eliminate tax breaks and extend the sales tax to services that go untaxed today. That’s the part posing political problems.
Susan Bourgeois, secretary of Louisiana Economic Development, and three of her senior aides preceded Nelson and extolled the benefits of two corporate tax breaks that in theory could be reduced or eliminated to help pay for moving to a flat tax.
One program, Quality Jobs, gives tax subsidies to companies that invest in Louisiana, while the other one pays companies to film movies and TV shows in the state.
While Bourgeois kept a fairly neutral tone in describing them, her agency’s deputy secretary, Anne Villa, flatly said, “Quality Jobs is a great incentive.”
The program cost the state $150 million last year and produced a return on investment of only 11 cents in state tax revenue for every $1 given away, according to Nelson’s revenue department.
Meanwhile, Chris Stelly, who oversees the film and TV tax credit, sought to show a video to lawmakers touting the benefits of that program but couldn’t because of technical difficulties.
That program cost the state $134 million last year and also generated only 11 cents in tax revenue for every $1 given away.
Bourgeois and Villa only briefly mentioned the cost to taxpayers from those two programs aimed at encouraging companies to invest in Louisiana. They both preferred to note a different return-on-investment measure showing that the tax breaks increase Gross Domestic Product.
The different messages from the Louisiana Economic Development officials and Nelson prompted state Sen. Adam Bass, R-Bossier City, to ask whether they were on the same page.
“We’re all talking very actively about pulling in the right direction,” Bourgeois replied.
In pitching his plan, Nelson is essentially giving legislators a choice: Do they favor reducing tax rates and eliminating tax breaks or do they favor the current system?
Or legislators could reduce tax rates and keep two taxes that are scheduled to expire on June 30. One is a temporary .45-cent sales tax, and the other is a 2% tax on business utilities. Both were approved in 2018 by then-Gov. John Bel Edwards, a Democrat, and the Republican-majority Legislature.
Republican lawmakers have said emphatically that they want the .45-cent sales tax to disappear, but doing so would cost the state $455 million next year.
“We can’t have a tax cut on a tax cut,” Nelson said in an interview after the hearing, referring to the flat-tax proposal and the expiration of the temporary sales tax.
Today, individuals who earn up to $12,500 pay 1.85% of their income in taxes, those who earn between $12,500 and $50,000 pay 3.50% and earners above $50,000 pay 4.25%.
Nelson said collapsing those three rates into a 3.8% rate and raising the standard deduction to $12,500 from $4,500 would cost the state about $500 million next year.
Nelson wants legislators to eliminate tax breaks to pay for that.
Nelson includes raising the standard deduction in his plan because simply moving to a flat tax would shift the tax burden from the rich to the poor given the current rate structure.
Because of tax breaks for the wealthy and a high sales tax that hits the poor hardest, Louisiana already has a regressive tax system, where people who earn less than $18,000 pay 13.1% of their family income in taxes while people who earn over $552,000 pay only a 6.5% tax rate, according to the Institute on Taxation and Economic Policy, a progressive nonprofit in Washington, D.C.
At the same time, Nelson would like to reduce the top corporate nominal tax rate from 7.5% - the highest in the South – to 5%, which is what corporations actually pay.
“The corporate tax rate looks high, but the actual rate is competitive thanks to tax breaks,” said Sen. Stewart Cathey, R-Monroe.
Nelson also proposes merging two state savings accounts – one is known as the Budget Stabilization Fund, which contains $1 billion, while the other is the Revenue Stabilization Fund, with $2.8 billion. Under his plan, the state would keep $3 billion in the single fund and spend the other $800 million on infrastructure projects that aim to create jobs.
He doesn’t want to use any of that money to help the state address the $587 million shortfall that lawmakers are facing next year.
Merging those two funds would require the approval of voters through a change in the constitution. That would take place in March, under the Landry administration’s plan.