Louisiana Proves That Raising Taxes Won’t Cure Budget Problems

Louisiana has been mired in a three-year long financial crisis caused in part by the drop in oil prices. The state has become used to mid-year spending cuts and special sessions in an attempt to find new revenues for the government. But the collapse in oil prices this decade has taken away a major source of revenue for Louisiana.

Every year, billions of dollars in tax increases were put on the table in order to stave off cuts. And the Louisiana legislature passed many of those tax bills. Yet the state’s budget remains in crisis. In many cases, the tax hikes have not generated the revenue that officials projected.

Progressives want to use Louisiana as an example of why free-market economics fails. On the contrary, Louisiana is becoming a textbook argument against the idea that raising taxes can solve long-term fiscal problems.

A sharp drop in oil prices in 2015 exacerbated the Pelican State’s financial woes. State officials were forced to make massive cuts to popular programs, even as they struggled to find additional revenue.

Louisiana is becoming a textbook argument against the idea that raising taxes can solve long-term fiscal problems.

Louisiana, like many Southern states, has a long history of populism. The state’s modern budget was shaped by the legendary Huey Long. First elected governor in 1928, Long promised big spending on everything from infrastructure to free textbooks for children. Long financed these programs by taxing Louisiana’s oil industry and other businesses. Long’s son, the late U.S. Senator Russell Long, famously summarized his father’s way of doing business: “Don’t tax you. Don’t tax me. Tax that fellow behind the tree.”

Fast forward a little more than 80 years later and Louisiana is still governed by Long’s economic thinking, despite the efforts of reformers such as former Republican Governor Bobby Jindal. Louisiana’s tax climate remains inhospitable to business. According to the Tax Foundation, Louisiana last year had the worst decline in business climate of any state, dropping from 36th to 41st on the organization’s annual survey.

The reason? Louisiana’s current governor, Democrat John Bel Edwards, pushed through a 1 cent sales tax increase shortly after taking office. The state’s combined state and local sales taxes are now the highest in the country.

The state’s combined state and local sales taxes are now the highest in the country.

But the sales tax isn’t the only levy that Louisianans now must contend with. In 2015 alone, the state raised taxes on a range of goods and services from corporations and business utilities to cigarettes. Last year, legislators hiked tax rates on everything from car rentals to Airbnb rentals.

The result? Instead of closing the budget deficit, revenues fell short once again and the state faced another round of mid-year cuts, slashing funding for state universities and health care.

The reason taxes did not produce the expected revenue is clear to anyone who understands the Laffer curve. According to economist Art Laffer, there is a certain point in which tax increases do not generate the expected amount of revenue. Tax increases have harmful effects on businesses. Those businesses generate less economic activity and those result in job losses and other losses of revenue that ripple throughout the entire economy.

Many on the Left deride Bobby Jindal’s tenure as governor, accusing him of “wrecking Louisiana” through tax cuts in order to smear free markets in general. If Jindal “wrecked” Louisiana, then what’s the word to describe what is Edwards doing?

Louisiana, like many other states, has a problem with dedicating too much of its spending either through its laws or through its constitution. But history and experience shows, yet again, that states cannot tax themselves into prosperity. The better course is to make the tax base as broad as possible and resist the temptation to stick it to corporations. Perhaps voters will have the wisdom to correct course when statewide elections come around again in 2019.

Kevin Boyd is a contributor for Opportunity Lives. You can follow him on Twitter @thekevinboyd.