BATON ROUGE — Do you want the state to take a small part of your federal tax cut savings to help solve its budget problems?
Right now, that will happen automatically for many Louisiana residents as the federal tax cuts lower the value of the deductions they can take on their state returns. And as the Legislature heads into a special fiscal session on Monday, it is one of the only possible aids to closing a $1 billion budget gap that both Democrats and Republicans seem happy to accept.
State officials estimate that the federal tax cut changes will result in a $226 million windfall in state tax collections — or nearly a quarter of the revenue that legislators need to replace if they want to avoid cuts in health and education programs.
As a result, Gov. John Bel Edwards and Republican leaders are counting on holding onto the extra taxes, and no one has asked taxpayers if they would rather keep any of the money for themselves.
Political analysts say that the state’s budget problems are serious enough that this probably makes sense.
“You know, the first thing we do in a hole is to stop digging,” said Jan Moller, executive director of the Louisiana Budget Project, a non-profit research group. “We are a billion dollars short of what we need to just stay even.”
Louisiana will receive the tax windfall because it is one of only three states that lets residents deduct all of the taxes they pay to Uncle Sam. So the federal tax cuts will reduce the size of those deductions for many residents and thus increase their state tax bills.
“There’s no doubt the federal tax changes will lead to an increase in revenue at the state level because of the way our taxes are tied to the federal tax liability,” said Dr. James A. Richardson, an LSU economics professor who was the co-chair of a bipartisan task force that studied possible changes in state budget and tax policy.
“The state will essentially get a portion of your tax cut,” he added. “That’s the bottom line.”
The increases in state taxes will vary by income levels and probably range from just tens of dollars to a few hundred more for each taxpayer. State officials said the increases would equal just a fraction of the federal tax cuts because the state’s top tax rate is only 6 percent.
Taxpayers wealthy enough to itemize deductions for home mortgages, property taxes and charitable donations would feel a bigger pinch. About 460,000 Louisianans, or roughly 25 percent of the state’s taxpayers, itemized deductions in 2015, IRS data shows.
State officials hope that the extra tax money could help the governor and Republican leaders finally reach a budget compromise after two years of squabbling and temporary fixes.
A one-cent increase in the state sales tax, which the Legislature approved as a stopgap two years ago, is set to expire this summer. Edwards has said that the state would have to make drastic cuts in health care and higher education if he and the Republicans cannot agree on how to replace that revenue.
Edwards is opposed to renewing the extra, or fifth, penny of the sales tax on the purchase of merchandise. He would prefer to extend limits on tax exemptions and deductions for corporations. He also has suggested extending the basic four-cent sales tax to services like cable TV and home repairs.
Republican leaders oppose expanding the sales tax to services, and House Speaker Taylor Barras, R-New Iberia, wants any revenue measures to be accompanied by controls on state spending growth. Other Republicans have floated the idea of renewing a quarter or a half of the extra sales tax penny on goods.
Although some political analysts have little faith that Edwards and the Republicans can reach a deal, Richardson and others say they are cautiously optimistic. Edwards and many of the lawmakers are up for re-election next year, and they know that if they cannot reach a compromise in the special session, they will have to spend the next three months in this year’s regular session slashing state programs.
“With the conversations I’ve had with legislators and other folks, I think there is a better chance this time that we will have some success,” said Barry Erwin, the president and chief executive of Council for A Better Louisiana, a non-profit group.
“I don’t think it will be perfect or a lot of real reform,” he said. But a compromise that involved keeping a portion of the fifth sales tax penny, making the limits on corporate tax breaks permanent and “trying to piece things together after that” to hit the revenue goal could be possible, he said.
Erwin said he believes that a majority of legislators “don’t want to run for re-election themselves with the stigma of not being able to address this again.” But taxes require approval from two-thirds of the legislators, “and that’s what makes it a bigger leap,” he said.
The budget task force co-chaired by Richardson recommended last year that the Legislature eliminate the state deduction for federal taxes, which costs Louisiana $900 million a year, and lower the state’s tax rates. That would require voter approval of a constitutional amendment, and the Legislature has not shown any interest in that.
Edwards has instead proposed reducing the state deduction for itemized federal deductions from 100 percent to 50 percent. That might raise an extra $150 million to $200 million in revenue from wealthier taxpayers, but most analysts doubt Republican leaders would agree to that.