Tax Analysts Blog

A Very Good Tax Reform Idea in Louisiana

Posted on Mar 18, 2015

Louisiana Gov. Bobby Jindal (R) has a tax plan that should be creating buzz all around the country. He wants to convert some of the state's individual and business tax credits from refundable to nonrefundable. Let's be clear: Refundable tax credits are government transfers. They are welfare. They merely use the tax code as a vehicle to take money from some people and give it to others. And apart from the earned income tax credit, no refundable credits represent sound policy.

Louisiana pays $526 million a year to recipients of refundable credits. That is, the state writes a check to people. Many of my liberal friends dislike Jindal because he is pretty conservative. But liberals and conservatives alike should support this proposal. Liberals should bemoan the regular payment of a half-billion dollars, most of which I suspect goes to upper-income people. That money could be used for education or transportation or healthcare. Conservatives should support the proposal because almost all of these credits represent attempts to muck with the markets. Refundable credits to businesses are the definition of crony capitalism.

Jindal's proposal does not increase tax burdens. Not one citizen or business in the state will pay a dime more in taxes. Even Americans for Tax Reform says refundable credits represent spending.

And the refundable credits at issue -- as reported by State Tax Notes -- support activities that should not receive government support. There are credits that help the powerful energy sector in the state (for offshore vessels, natural gas, and alternative fuels). There are credits to help the entertainment industry (big in New Orleans) and dairy and sugar farmers. Of course, the state also offers the ubiquitous angel investor and research and development credits. The idea is to have the government help out the economy. That alone is terrible, because the government just isn't good at picking winners and losers. The reality is much worse. Refundable credits are ways to reward friends of politicians.

Jindal's proposal should pass -- and it should be emulated by other states. There will be resistance in Louisiana. The opponents will be the ones who want to take your money and put it in their own pockets.

Read Comments (6)

robert goulderMar 17, 2015

Fascinating development. As you note, refundable credits are no different from
run-of-the-mill government spending -- except they are much worse. That's
because they are often off-budget and exist beyond the scrutiny of the
appropriations process (such as it is). So, not only are we talking about
spending, but typically it's hidden spending - which is completely
indefensible. Our revenue systems exist to bring necessary funds into the
public fisc, not to dish out subsidies to the fortunate few.

That said, David, you do realize where this conversation is headed? Eliminating
refundable tax credits for business cronies is merely the opening act. Next up:
the EITC and its brethren. Don't think for a minute those refundable credits
are not in the cross-hairs of Jindal and like-minded policymakers across the
country -- both in state houses and in Washington.

Many observers will contend the EITC is a different kettle of fish, because
making those credits nonrefundable is tantamount to throwing the poor under the
bus. Of course, others will respond that a tax subsidy is still a tax subsidy.
If you're going to repeal some of them, ... well, you know the rest.

Charles FMar 19, 2015

But to apply the logic that has sunk federal tax reform...
Somewhere there's at least one poor person who will lose a refundable tax cut
and $1 in their refund.
And that $1 loss represents a greater grievance than any benefits of
simplifying the tax code, consistent revenue collection or reduced refunds for
the rich.

emsig beobachterMar 19, 2015

Would the State of LA allow unusable credits to be traded? Can they be carried
forward or back? You're right on -- refundable credits are stupid.

Robert TaylorMar 19, 2015

Another point to support the elimination of refundable tax credits: It would
also reduce the economic incentive to engage in tax fraud.

emsig beobachterMar 19, 2015

Making EITC credits non-refundable is a bad idea. It hurts the most vulnerable
members of the population and any state can piggyback on the federal EITC.
Refundability of tax credits for businesses is different. Most states have loss
carry forwards -- they can do the same with tax credits. Similarly, the state
can permit trading of unusable/unused tax credits and impose a tax on the
trades.

Phil HoodMar 22, 2015

I think refundability of EITC is okay. Milton Friedman would even have approved
of that kind of transfer since he supported guaranteed minimum income. But for
sugar beet farmers and energy companies, it's plainly a payoff.

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