Friday, May 24, 2024

Louisiana tax cut triggers worry some lawmakers

by BIZ Magazine

By Wes Muller, Louisiana Illuminator

A set of new automatic tax cuts that Louisiana lawmakers said would only occur during an economic boon have reached two of their three requirements to take effect. Now the chairman of the Senate Revenue and Fiscal Affairs Committee has introduced new legislation to curtail potential revenue losses if the tax cut triggers take effect.

Two years ago, Sen. Bret Allain, R-Franklin, championed a package of sweeping tax reform bills that included rate cuts for corporate and individual taxpayers. At the time, that legislation was revenue neutral, but further cuts could happen through automatic rate reductions that lawmakers baked into the bills.  

The triggers take effect if a set of specific economic thresholds are met. 

For a corporate franchise tax cut, the prior fiscal year’s corporate income and franchise tax collections and the state’s total revenues must exceed what they were for the fiscal year that ended June 30, 2019. Plus, the state’s budget stabilization fund, or so-called “rainy day fund,” must reach a balance that is at least 2.5% of total state revenue receipts.

“We’re real close to the trigger,” Allain said in a phone interview. “I think we’ve hit the first two [thresholds]. Now it just depends how much goes in the rainy day fund.” 

State revenue receipts total about $37.8 billion, and the rainy day fund balance is currently $721 million but is projected to increase to $903 million during the next fiscal year, according to Debbie Vivien, chief economist with the Legislative Fiscal Office. 

To address the issue, Allain has pre-filed Senate Bill 6 ahead of the upcoming regular session, which begins April 10. The bill would reduce the amount of tax rebates offered through the state’s Quality Jobs Program if franchise tax rates are cut either through the rate reduction triggers or through new legislation. The Quality Jobs Program offers payroll tax rebates to companies that create jobs and sales tax rebates on purchases of materials used in construction.

It is a similar situation for the individual income tax cut trigger. In a State Tax Structure Subcommittee meeting last month, Vivien told concerned lawmakers she expects the first two thresholds will be reached but not the rainy day requirement. However, Vivien pointed out that current forecasts, which are conservative, are unlikely to hold steady for the rest of the year. 

“If everything holds the way that we have it now — which it probably won’t — but if it does, we won’t have it triggering on because of the rainy day provision,” she said.

The first calculations to determine the tax cut triggers will not take place until April 2024 and will account for the previous fiscal year ending mid year 2023. The calculation should use the current rainy day fund balance of $721 million, but even a balance of $903 million would still come just shy of triggering the third threshold, Vivien said in a phone call Wednesday.

Allain’s original 2021 legislation didn’t initially contain the tax cut triggers. Lawmakers added them later during the session, drawing warnings from budget watchdogs that they would become problematic in the future. At the time, lawmakers said the triggers would only occur during times of great economic growth, and Allain said they were needed to incentivize voters to approve the primary tax reform proposal

The Legislative Fiscal Office anticipates the economy will contract this year, not grow. The corporate franchise and income tax revenue for 2023 is forecast to be roughly $813 million, which is a significant net decrease from the $1.4 billion collected during the 2022 fiscal year. 

Even though those figures indicate a weakening economy, the trigger provisions use 2019 figures as a baseline from which to measure “growth.” The state’s 2019 corporate franchise and income tax revenue was $630 million, according to the Department of Revenue.

The Louisiana Budget Project’s Jan Moller said his organization opposed the triggers when lawmakers first unveiled them in 2021. 

“It was exactly this scenario that we were worried about — a temporary fiscal boom leading to permanent tax cuts,” Moller said.

Whether Allain’s new legislation would be effective in stemming revenue losses caused by the tax cut triggers remains to be seen. A fiscal impact statement for the bill is still pending. 

“It’s a good idea on its face to cut back (or eliminate) the Quality Jobs program, which research has shown is ineffective and costs $180 million a year that could be better spent elsewhere,” Moller said. “The trigger is still terrible policy, but revenue neutral is certainly better than an automatic permanent tax cut financed with temporary revenues.”

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