Tax Exemption Safeguards Would Prevent Future Waste and Misuse

New safeguards are needed to curb the growth of costly tax exemptions, rebates, credits and other loopholes that detract from the state’s ability to fund basic services. The Legislature should ensure that these tax breaks fulfill their original promise by requiring periodic reviews to evaluate the state’s return-on-investment, and by making it easier to eliminate breaks that don’t measure up.

There are several reasons why real tax reform is needed to protect the state from unproductive, costly tax breaks:

  • The cost of tax exemptions grew 167 percent between 2001 and 2011. A lack of adequate safeguards against unproductive and costly tax exemptions has allowed their cost to grow from $1.8 billion in 2001 to more than $4.8 billion in 2011 – a 167 percent increase when adjusted for inflation. Meanwhile, the amount of revenue raised through taxes fell by 6 percent over the same period.
  • Tax exemptions persist for decades without any formal review. Most tax exemptions aren’t reviewed by the Legislature after they are passed, and the majority is missing safeguards like “sunsets” that would require them to expire on a certain date unless action is taken to renew them. Thus, the state pays these costs year after year without knowing whether taxpayers get a positive return on their investment.
  • Tax exemptions aren’t constrained by state revenues. While state spending on things like K-12 schools and health-care services is limited by available revenue, tax exemptions do not face this constraint. Many tax exemptions function as open-ended entitlement programs, meaning taxpayers are required to finance them, regardless of cost.
  • Tax exemptions are difficult to modify and repeal once approved. Reducing spending on schools, transportation and other services can be done by a simple majority vote of the Legislature, or, in some circumstances, by the governor’s executive order. Tax exemptions require a two-thirds majority vote to be modified or eliminated. This gives tax-code spending a level of protection that other forms of spending do not enjoy, and allows a minority of lawmakers to protect specific tax exemptions.

The evidence is clear: Louisiana needs new safeguards. The Legislature should add new safeguards to restore balance to the state budget and protect critical services that are being cut each year to make room for more tax-code spending. All tax breaks should have expiration dates and face a regular review. Legislators also should consider capping the year-to-year cost of each tax exemption, and requiring a simple majority vote to repeal or modify tax exemptions. There are a few bills that offer a step in the right direction. SB 219 (Donahue) would help control the cost of refundable tax credits and rebates. HB 316 (Jackson) would make it easier to review each tax exemption’s return on investment. Still, the most effective way to curb the growth of costly tax exemptions is to pass a law that encompasses the entire set of above recommendations.

Read “Tax Exemption Reform Must Prevent Future Waste and Abuse” for more information on this topic.