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New Buckeye Institute Report Finds Louisiana’s Proposal to Raise Taxes Will Hinder Economic Growth

Jun 05, 2017

By Orphe Divounguy, Ph.D.Rea S. Hederman Jr.Bryce Hill, and Lukas Spitzwieser

Download PDF of Report

Columbus, OH – A new report, Addressing Louisiana’s Budget Shortfall: Strategies for Growth, released today by The Buckeye Institute’s Economic Research Center, found that Louisiana’s proposal to raise taxes to finance more government spending will hinder economic activity and growth. 

The research, conducted in conjunction with the Pelican Institute, Louisiana’s premier voice for free markets, determined that eliminating the corporate income tax and replacing it with a revenue neutral sales tax increase creates jobs, grows the economy and increases tax revenue.

“Rather than pursue revenues through increasing the tax burden on citizens, Louisiana would be better served by reducing or eliminating corporate taxes, and creating incentives for increasing investment, and job creation across the state,” said Orphe Pierre Divounguy, the lead economist with Buckeye’s Economic Research Center and the lead author on the report. “Eliminating Louisiana’s corporate income and franchise taxes offer the best path for spurring economic growth and eliminating some sales tax exemptions would have the least harmful effect on the state’s gross domestic product while still raising additional tax revenue.”

Other key findings in the report are:

Eliminating the corporate income tax is the most pro-growth policy and would generate more than 11,000 jobs in the first two years, and boost the state gross domestic product by almost $1 billion dollars.

The commercial activity tax (CAT) would cause the most pain for least gain, reducing employment by more than 11,000 jobs, and would generate only around $260M in tax revenues. When tested, the CAT caused the biggest drop in the state’s economy and withdrawing it from consideration was the right decision by the legislature.

While tax base broadening is good economic policy, it only works when it is offset by tax rate reductions, otherwise it is a tax increase which will reduce consumption and investment.

To resolve the state’s perennial budget crisis, Louisiana must adopt a more permanent tax and spending structure that fosters real and sustained economic growth.

The report used a dynamic scoring model, developed by economists at Buckeye’s Economic Research Center, to test more than a dozen possible changes to Louisiana’s tax policy and show their effects on gross domestic product, jobs creation or loss, and revenue. The 12 proposals analyzed in the report are:

  1. Eliminating Louisiana’s general sales tax exemptions;
  2. Eliminating Louisiana’s corporate income tax;
  3. Introduction of a commercial activity tax;
  4. Eliminating Louisiana’s franchise tax;
  5. Excluding federal deductions on Louisiana’s corporate income tax;
  6. Allow the fiscal year one percent sales tax increase to expire;
  7. Repealing some state sales tax exemptions;
  8. Extending the sales tax to certain services;
  9. Reducing Louisiana’s individual income tax credits;
  10. Replacing Louisiana’s corporate income tax with a revenue neutral commercial activity tax;
  11. Replacing Louisiana’s corporate income tax with a revenue neutral removal of sales tax exemptions; and
  12. Adopting Governor John Bel Edwards’ proposal.

The report was authored by Orphe Pierre Divounguy, PhD, the senior economist at Buckeye’s Economic Research Center; Rea S. Hederman Jr., who oversees the work of the Economic Research Center and serves as Executive Vice President at the Buckeye Institute; Bryce Hill; and Lukas Spitzwieser.

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