Follow the money

With a tight state budget, legislators wonder what we're getting—and losing—from the state's 468 exemptions, rebates and credits.

A bill that former Rep. Jane Smith co-authored in 2009 cost the job of one Jindal Cabinet member. It might also end up costing the state more than $200 million a year.

Smith says she just wanted to encourage people to drive natural gas-powered vehicles. But her bill promises a tax credit of up to $3,000 for vehicles that burn “alternative fuel,” including, but not limited to, natural gas. The Legislative Fiscal Office estimated the program would cost $907,000 over five years.

More than half the Legislature co-sponsored Smith's bill, and Gov. Bobby Jindal signed Act 469 into law. And then, apparently, everyone in power forgot about it.

Until three years later, when the Department of Revenue got around to creating rules for the program. During the Legislature's regular session in April, then-Revenue Secretary Cynthia Bridges issued the first-ever list of vehicles eligible for the program, including some of the state's most popular models. When word of the list spread after the session ended and reporters discovered how expensive this obscure credit had become, Bridges, who had served three consecutive governors, resigned.

Had the Jindal administration notified legislators of Bridges' ruling while they were still in Baton Rouge, the law could have been changed. Smith herself, who by that time had been appointed deputy secretary at Revenue by Jindal, did not give lawmakers a head's-up. After Smith's bill caused Bridges' departure, Jindal elevated Smith to interim secretary.

Jindal rescinded Bridges' ruling on a technicality, but the law still exists. Even now, Revenue is working to determine the proper scope of the credit; the department says it will cost at least $18 million. An analysis by The (Monroe) News-Star, which broke the story, found the credit could suck $200 million annually from the state's coffers.

It's unusual for the actual cost of a law to exceed the estimated cost by 1,885% [and counting]. So in that sense, the alt-fuel tax credit is an outlier.

But in other ways, the credit is an instructive example of what the Legislature daintily calls “tax preference expenditures.” It strayed far from its supposed original mission and was subjected to little oversight. Now people at least know what it is, but no one knows how much it costs.

By LED's count, the state recorded nearly $6.8 billion in tax expenditures in the 2010-2011 fiscal year. Some activists have called this motley collection of 468 credits, rebates and exemptions the state's “hidden budget.” While often described as “tax breaks,” many tax expenditures are perhaps better understood as spending: You do something government likes, and government writes you a check.

In flush times, the state's hidden budget seldom is debated by lawmakers or scrutinized by the media. But in the world we live in today, it's hard to sacrifice about $7 billion without anyone complaining, and the hidden budget has been dragged out into the sunlight.

While few tax expenditures get the attention of the vehicle tax credit, they all mean something to someone. But what they mean to the state, good or bad, often is hard to measure, although a group of legislators is about to try.

The Legislature's new Revenue Study Commission seeks to get a handle on what we're getting for our money, and whether it might be a good idea to hang on to some of it. It's a task that will require time, effort, money, and, when the report is finished, the will to do something about it.

“The bible's wrong”

Greg Albrecht, the Legislature's chief economist, admits the fiscal note his office created for the alt-fuel tax credit was way off. But in fairness, predicting the future is a tough racket.

As Louisiana emerged from the Great Recession and people started buying cars and trucks again, Albrecht surmises, many of them selected new “flex-fuel” vehicles that can run on gasoline or a blend of up to 85% ethanol. Those flex-fuel vehicles are driving up the cost of the credit.

Tax expenditures are unpredictable. Albrecht says the cost of one might jump 20% in one year, then fall just as abruptly the next year.

“We can never be sure what our exposure is,” he says. “The possibility for surprises is very big.”

Albrecht wants lawmakers to focus on the “expenditure” aspect of tax expenditures. These programs aren't really tax breaks, he says, when the benefit has no relationship to the recipient's tax liability.

“We're reimbursing people for some spending we like,” Albrecht says. “That's what all of this stuff is. We are spending. The only tax aspect is, we're using the Revenue Department to cut the check.”

In the most recent session, the Jindal administration successfully pushed for a “rebate” program that pays 25% of the cost of headquarters relocations. But if a company is setting up a brand-new location in Louisiana, it's not going to owe taxes right away, Albrecht says.

“We're not going to be rebating its taxes back,” he says. “We're going to be rebating your and my taxes back [to the company]. ... With rebate programs, we're not even pretending there's a tax association. You don't even file a return. You just claim your money and we cut you a check.”

Or take the digital media program, originally started under former Gov. Kathleen Blanco, that offers credits worth up to 35% of qualified expenditures. Again, the benefit is tied to expenses, not revenue or tax liability. It's a subsidy that reflects state support for growing Louisiana's digital media sector. That's not to suggest the policy necessarily is misguided—Louisiana needs high-growth industries if it hopes to catch up with top-performing states—but calling the incentive a “tax break” confuses the issue.

As the Legislative Fiscal Office tries to estimate the future costs of tax expenditures, the Department of Revenue attempts to report the actual costs through its 400-page “Tax Exemption Budget.”

“That's supposed to be the guide telling us how much is being taken for these various exemptions,” says PAR President Robert Travis Scott. But he says it's “nowhere close” to comprehensive.

For example, the exemption budget shows $866.5 million in sales tax exemptions grouped under a single category cryptically labeled “other exemptions.” Businesses are not required to report which of these exemptions they're using, so if the Legislature's commission tries to review this group, it won't have reliable data.

For many items, the budget's authors admit they can't even estimate the fiscal impact because “there is no reporting requirement for the data.” And on page after page, the report simply asserts that the purpose of the expenditure “is achieved in a fiscally effective manner,” without giving any evidence to support the claim.

Scott suggests the alt-fuel debacle may be a symptom of a system that promotes obscurity.

“We're going into a phase now where we're going to be re-evaluating all these things, and we have the Department of Revenue's bible on this,” he says. “And apparently, the bible's wrong.”

Winners and losers

You won't find many issues where the liberal Louisiana Budget Project and the conservative Pelican Institute for Public Policy share common ground, but this is one. Both groups acknowlege there's merit in the Revenue Study Commission's work, although with different motivations.

Basically, the liberal argument is that tax expenditures sacrifice money that could be spent on vital services. A conservative might argue that the state brings in more than enough money, while still believing that tax breaks overcomplicate the tax code and distort the free market by favoring some activities over others.

“I hope they [the commission] come up with a system that is fairer across the board and raises revenue for the state,” says Budget Project Director Jan Moller, “so we can make critical investments in education, health care, infrastructure and the other known building blocks of a strong economy.”

Moller says tax expenditures aren't all bad. He says the state's Earned Income Tax Credit, which benefits the working poor and stimulates spending that goes straight back into local economies, is among those that should be protected.

A relative handful of expenditures make up most of the total cost. The Budget Project still is in “research mode” on this issue, Moller says. But so far, they're most interested in three targets: the severance tax break for horizontal drilling, which the Revenue Department says costs about $250 million a year; the film industry subsidy, which a state-commissioned report says had a net fiscal cost of $152.9 million [based on credits redeemed] in 2009; and the aforementioned $866.5 million “other exemptions” bucket.

Pelican Institute President Kevin Kane says the state doesn't need more revenue. He says it makes sense to eliminate tax expenditures that have outlived their usefulness, but he worries about any effort that might lead to higher taxes.

Kane notes that companies in Louisiana pay local taxes on their inventories. That the state gives a tax break to counteract a local tax shouldn't be construed as a giveaway or lumped in with something like the movie subsidy, he says.

“There's a difference between giving something away and letting people keep what is really theirs in the first place,” Kane says.

The Jindal administration does not make that distinction. As LED Secretary Stephen Moret confirms, their position is that ending a tax expenditure subsidy is the same thing as raising taxes. Chew on that for a moment: Jindal says if the state stops subsidizing some businesses, that's a tax hike on them.

Tad DeHaven, a budget analyst for the libertarian Cato Institute and a former Indiana state budget official, says handing out targeted incentives is easier politically than the hard work of broad tax reform. He says incentives for certain industries effectively de-incentivize investment in non-favored industries. The process doesn't create jobs or wealth, he argues; it just moves capital around.

“It's picking winners and losers,” DeHaven says. 

In secret and sunlight

Tax expenditures quite often are sold to legislators as economic development drivers. However, LED Secretary Stephen Moret says only about 5% of the $6.8 billion is tied to programs managed by his department, and says most of the big-ticket expenditures predate the current administration.

For LED, the tax expenditure conversation is a chance to dispel certain myths about economic development incentives. For one, most incentives are not discretionary. While it might be up to the department's Board of Commerce & Industry to decide if someone qualifies, generally speaking, if you meet the criteria, you get the benefit.

And it's not all about landing big fish from out of state, although those “wins” get headlines. There are plenty of tax goodies for existing businesses. BRAC President/CEO Adam Knapp says local companies often leave money on the table simply because they don't know what's out there.

One of the biggest misconceptions, Moret says, is that the state hands out free money, issues a press release, then sits back and hopes the recipients do what they said they'd do. He says companies generally don't get the benefits until they produce the results, such as hiring a certain number of people. Even when companies get grants on the front end from the state's Megafund or Rapid Response Fund, they're required to sign agreements with timelines and clawback provisions for underperformance.

LED's reports about the programs it manages are accessible from the department's homepage. Taxpayers who want to know where their money's going also can look up specific companies.

Knapp says the most frequently used programs locally among LED's 5% are Quality Jobs and Enterprise Zone. Oftentimes, both programs apply to a single project. Both are nondiscretionary and provide rebates over several years for creating new payroll. Credit programs for research and development and for digital media also are important to BRAC's target industries.

Incentive packages are decided in secret negotiations between economic development officials and business executives. Consultants sometimes will admit­—quietly—that companies often already know where they're going before they get to that point. Knapp and Moret say it's impossible to know for sure if companies are playing different states or regions against each other to up the ante, but both say they study the industry and the possible incentives the competition can put up before making an offer.

Incentives seldom, if ever, are the sole reason for a company's decision. But Knapp says the state's aggressive digital media program, for example, can put the Capital Region on a company's radar, allowing BRAC to make its case for the area's overall tax structure, business environment and workforce readiness.

It's hard to measure an incentive's value because it's hard to say how much of the rewarded activity would be happening anyway. Albrecht makes an intriguing point: Most people say that without subsidies, there would be no local film industry. And, setting aside the benefits a local film industry might bring, movie tax credits are a net loss to the state budget.

So if the return on investment for film credits is negative, even when we're pretty sure that almost 100% of the film activity is caused by the incentive, what does that say about the ROI for programs where perhaps only 80%, 50%, or 20% of the activity is caused by the benefit? It's an interesting question, one that may be impossible to answer.

Revenue-neutral

While a tax expenditure can be approved by a simple majority, it takes a two-thirds vote to repeal one. However, the Legislature can suspend one for a year with only a majority in favor and without the governor's approval.

State Sen. Jack Donahue, a Mande-ville Republican who chairs the Finance Committee, was the lead author of Senate Concurrent Resolution 103, which established the Legislature's new Revenue Study Commission. The resolution says the commission should “identify the low-performing or antiquated tax preference expenditures and recommend their temporary or permanent reduction or elimination.” The commission met for the first time July 23, and their report is due Feb. 1.

“The state is in dire straits financially,” Donahue says. “Obviously, we have been cutting the budget quite a bit. As we cut the budget, I was wondering if there's any money that's available on the top side.”

But if Jindal gets his way—and he will hold the veto pen—the commission's work won't help legislators raise new revenue or avoid making further cuts to health care and higher education.

“We want to ensure that any changes that are made are budget-neutral,” Moret says. “If any exemptions are eliminated or curtailed in some way, that the impact of that is offset by tax reductions elsewhere.”

Say the initial News-Star analysis of the alt-fuel credit proves correct, and the credit really will cost the state $200 million. Remember, the rulemaking process is ongoing, so that number is far from certain. Even if everyone in state government agrees the credit is bad policy and should be repealed, that's not good enough for Jindal.

“You've got to find a way to neutralize it, and I'm not sure how we would do that,” says Smith, the interim Revenue secretary. “Anything changing about that tax exemption budget would be considered a raise of taxes, because you're taking something back that you gave somebody. … We'll have to find that $200 million somewhere.”

CABL President/CEO Barry Erwin says Jindal's approach would further complicate what surely will be a difficult and politically touchy process.

“I hope we don't get ourselves stuck in that box,” Erwin says. “That doesn't seem like a good way to develop tax policy.” He says each credit, rebate or exemption studied should stand or fall on its own merits.

The most obvious explanation for the governor's position is that it's been crafted to stress Jindal's anti-tax bona fides and ensure he stays in the running of the Mitt Romney veepstakes.

Jindal has taken the Americans for Tax Reform pledge to never raise taxes, and ATR President Grover Norquist has suggested Jindal would make a good Romney running mate. ATR spokesman John Kartch says Jindal's position is consistent with the pledge and reminiscent of Ronald Reagan's view when Reagan signed the Tax Reform Act of 1986.

Pearson Cross, head of the political science department at UL-Lafayette, says people shouldn't assume Jindal only is concerned with his political ambitions.

“I think he's firmly committed to a government that lives within its means,” Cross says. “If it's your philosophy that it's not a revenue problem but a spending problem, you might want to change the tax code, but the one thing you wouldn't do is get more revenue.” He says Jindal's position might be sort of a placeholder, a general statement of principle that can be tweaked once the next legislative session begins.

Will lawmakers listen?

After only one meeting, the Revenue Study Commission's exact purpose remains somewhat ill-defined. Evaluating every single tax expenditure by Feb. 1 likely is impossible. It also seems unlikely the Legislature will attack standard tax breaks almost everyone gets.

State Sen. Dan Claitor, a Baton Rouge Republican and commission member, says he's not on the hunt for more revenue. He just wants to know if the state's getting a good return on its investments.

“I'm not going on a gold-prospecting mission,” Claitor says. “I'm going on more of a stock-picking mission.”

One suggestion that's been bandied about is dividing expenditures into categories, such as “high-performing,” “performing,” “low-performing,” and “non-performing.” But for now, not only does the state have no mechanism to measure “performance,” the concept hasn't even been defined.

It probably doesn't make sense to try to evaluate every item by the same metric. Whether it's a good idea to maintain the tax deduction for school supply purchases, it's hard to see how the deduction could be said to be “performing” or not.

Any break or credit that's worth a significant amount of money will have staunch defenders. In fact, every tax expenditure, even the ones almost nobody knows exists, likely has its own constituency. Those constituents can make phone calls and send emails to legislators, and some of them can hire lobbyists.

“I'm trying to get people to understand these things as spending,”?Albrecht says. “Maybe then we can justify cutting back on some of them, and not tick off Grover Norquist or something. I'm being a little facetious, but we need some politically palatable way if we're going to restrain anything.”

Building political cover by framing certain changes as spending cuts, rather than tax hikes, might work in a reality-based political environment. But this is America, home of the nuance-free attack ad.

“You can already see some TV commercial three years from now: 'So-and-so raised taxes $50 million dollars,' even if they got rid of a really bad tax credit,” Erwin says. “That's the way that political game works.”

Every expenditure was enshrined in law for a reason, and the reasons still may be valid in many cases. While legislators may decide that some clearly are outdated or useless—Claitor mentions an exemption for antique airplanes—the obvious targets are unlikely to add up to much, Erwin says.

The good news for people who support this effort is, the review isn't led by a “blue-ribbon” commission but by lawmakers, including top leadership, who seem to have some pull with their colleagues. So perhaps whatever they come up with won't be yet another report that gathers dust somewhere.

“You've got a nucleus of pretty heavy hitters,” Erwin says. “Then you've got other legislators who've proven effective in passing legislation.”

The Department of Revenue says 44 states, including Louisiana and the District of Columbia, produce some sort of regular tax exemption report. But some states try harder than others to really keep tabs on this stuff.

Iowa has a tax credit tracking and analysis program with two staffers dedicated to database management, and performs detailed reviews of several specific programs each year. Albrecht says he's not sure if Louisiana would be willing to devote comparable resources.

Is it too much to ask for Louisiana's taxpayers to know what we're getting for $7 billion a year? Albrecht, in his own cynical way, will provide one of the most important voices throughout this process. But will lawmakers listen?

“It takes money, it takes resources, it takes time and people,” he says. “You've gotta want to know. I don't know that they do.” 

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