Hey Louisiana, when the topic is comparing tax burdens: Don’t mess with Texas

Business Report

Louisiana is forever measuring itself against Texas—especially when it comes to taxes—but where would you fare better?

Here’s a hint: It depends on your income. But given the vast differences between the two states our tax burden fascination is a misguided comparison between apples and oranges.

As Dwight Hudson goes around the relatively affluent and decidedly conservative Metro Council district he was elected last year to represent, the constituent feedback he hears is mostly negative regarding Mayor Sharon Weston Broome’s proposed 5-mill property tax to fund road, sidewalk and traffic control projects.

Make no mistake: The rapidly growing District 9 in the extreme southeast corner of East Baton Rouge Parish is in need of infrastructure improvements, especially when it comes to relieving nightmarish surface street traffic. But residents here routinely tell Hudson they’re already paying too much in taxes, and, frankly, they simply don’t trust government with any more of their money.

There’s also another thing Hudson hears a lot from those he represents, as they lament their tax burden and what they’re getting—or not—for their money. It’s this idea that they’d be better off in nearby Texas, a state to which Louisiana invariably compares itself and with which it tries, often unsuccessfully, to compete.

“The perception is that you do better in Texas,” Hudson says. “I hear it a lot. People believe they pay too much here and that Texas is doing better with what they’ve got.”

This notion that the grass is greener—and the tax rates lower—just across the Sabine River is hardly limited to the residents of Council District 9. One can’t broach the subject of taxes at either the state or local level without someone asking, “What does Texas do?” Call it Lone Star envy or whatever you’d like, but when it comes to taxes and tax policy the eyes of Baton Rouge—and Louisiana—forever seem to be upon Texas.

It’s become something of a Pavlovian response. Have a governor or state legislator propose tinkering with Louisiana’s byzantine business tax code in even the slightest of ways and you can be sure someone from LABI or another business-friendly group will point out how such matters are handled in Texas. Responding earlier this month to those wanting to make an industrial property tax program more stringent, BRAC CEO Adam Knapp was quick to give his spin on how Texas administers an almost identical program. And, of course, the fact Texas has no income tax—and a lower sales tax rate—is a never-ending source of jealousy from almost anyone employed and calling Baton Rouge home.

At first glance, wanting to be more like Texas makes sense.

For starters, residents here—especially those in the middle income bracket and higher—never tire of professing their love for the income-tax-free life in Texas. Point out the tradeoff is significantly higher property taxes and the response goes something like this: “Well, look at what you get for the money.”

Everyone here seemingly has at least one relative or friend who—out of frustration over schools, job opportunities or quality of life issues—has left Louisiana to find their fortune in Texas. We’ve all driven its expansive highways and marveled at the remarkable number of tech companies, research facilities, white-collar businesses, warehouses, distribution centers and high-end retailers that appear to connect one sprawling metropolis to the next.

Moreover, the way Texas levies taxes, especially on corporations and businesses, is far simpler and easier to navigate. By the way, did we mention the lack of income taxes?

Complicating matters, many business and community leaders in Louisiana’s capital city remain gobsmacked—some 14 years after BRAC took its first canvas trip there—how once sleepy Austin, Baton Rouge’s equal on paper in almost every way 50 years ago, became the hippest, fastest-growing city in the south, now dwarfing Red Stick by every metric imaginable.

But do individuals pay less tax in Texas? That depends on your income level. While the spread between what you pay in Louisiana versus Texas isn’t great across the board, it’s true that higher income individuals do come out ahead under the Texas tax code, while those in lower income groups fare better in Louisiana.

The difference is so little because the combined state and local tax burden for Louisiana and Texas is almost identical. No doubt each state takes dramatically different ways of getting there, but the tax-paying destination, in the end, is essentially the same.

Not only that, but however you calculate it the tax rates in both states are among the lowest in the country. In other words, it’s an unsupportable argument to suggest Louisiana overtaxes its residents—or corporations—when looking at all 50 states, rather than simply glancing at our neighbor to the west.

Yet the comparisons persist—not only with individual and corporate taxes but also with respect to economic development strategies. Because of our geographic proximity to Texas and the abundant natural resources that have enabled both states to develop as hubs of petrochemical activity, we can’t help but look always over our shoulder.

For many obvious reasons, however, it’s not an apt comparison. Texas has an economy that’s nearly seven times bigger than Louisiana’s, a population more than six times larger, a different demographic makeup with a much higher poverty rate, different cultures and, perhaps most importantly, a very different decentralized form of government that gives more control to counties and municipalities. In other words, it’s something of a fool’s errand to forever measure ourselves against a standard by which we invariably come up short.

Perhaps, then, the question we should be asking is not why can’t Louisiana be more like Texas, but rather, is it even fair to compare?

“It’s only natural because of oil and gas that we would turn our economic development antennae to Texas,” says Robert Travis Scott, president of the Public Affairs Research Council of Louisiana. “But we really need to be thinking not just about Texas but at other peer states and look at how we can be more competitive with them.”

Breaking down the taxes

While Texas and Louisiana are very different in myriad ways, one thing that’s exactly the same is their tax burden. Both states have among the lowest tax burdens in the U.S., at 7.6%. They both, however, travel different paths to get there. In general, when it comes to individual state and local taxes there are three basic legs to the revenue-raising stool—income, sales and property taxes. Texas relies on two of those legs—property and sales taxes—while Louisiana taps into all three, though there’s a heavy emphasis on sales taxes. State government in Louisiana collects sales and income taxes, while locals rely on sales and heavily exempted property taxes.

According to the Tax Foundation, a Washington, D.C.-based nonprofit, Louisiana has the fifth-lowest effective tax rate in the nation—$2,950 per capita on an average per capita income of $38,906. Texas has the fourth-lowest, with an average per capita tax burden of $3,340 on an average per capita income of $44,081.

To see what this looks like at the local level, Business Report asked Jon LeBlanc, director of tax services at Postlethwaite and Netterville, to calculate the tax burdens for three hypothetical families in the 70180 ZIP code in East Baton Rouge Parish and then to estimate what those same families would pay if they lived in the 77380 ZIP code in The Woodlands, Texas.

For the purposes of the exercise, we gave our hypothetical families a dual income and two children. To see how different income levels affect the relative tax burdens, we ran the numbers for a family with $300,000 of taxable income and a house valued at $600,000, a family with $150,000 of taxable income and a $300,000 home; and a family with $75,000 of taxable income and a $200,000 home. (See chart below)

Not surprisingly, the results show that all three families would pay much higher property taxes in Texas. Beyond that, however, the data suggests the overall differences are relatively slim.

For instance, the highest earning family with the $300,000 income does better in Texas, by about $1,600, according to LeBlanc’s rough estimate. Even though the property taxes on their $600,000 home—nearly $16,000 a year—would be almost three times what they’d pay in Louisiana, their income and sale tax burdens in Louisiana, at more than $14,500, skew the numbers in favor of Texas.

For the family with the $150,000 income and the $300,000 home, the advantage again goes to Texas, but only by about $1,250. As with the higher earning family, their combined state income and sales tax burden in Louisiana, at $7,275, outweighs the $4,100 difference between their property tax bills in the two states.

For the lowest earning family, Louisiana is actually a slightly more favorable tax climate. The family that earns $75,000 comes out about $900 ahead in Louisiana because its income tax burden drops to less than $2,100 a year, while it’s property tax bill in Texas, at nearly $5,000, is relatively high.

Still, LeBlanc says, “The differences between the two markets for all three scenarios really aren’t that large in the grand scheme of things. If you were trying to decide between the two locales, the tax burdens wouldn’t make the difference. It would come down to other factors.”

Like schools, and it’s important to note that LeBlanc’s comparison doesn’t take into account the cost of private school tuition. The Woodlands, like many municipalities in Texas, has an excellent public school system, a factor that attracts many families to the area.

In East Baton Rouge Parish, by comparison, concerns over the state of public education drive many families to send their children to private schools.

If you factor in somewhere between $5,000 and $20,000 a year in private school tuition that our hypothetical families in East Baton Rouge Parish might pay, Texas quickly becomes a more affordable place to live.

By the same token, homeowners insurance in Louisiana is generally more costly than in Texas, as is auto insurance. There are other differences in the two states’ cost of living as well. LeBlanc’s calculation doesn’t pretend to settle the question of which state is better or more affordable. It simply compares relative tax burdens and concludes that as far as taxes are concerned, it’s a wash.

That’s important because when people evaluate whether to leave Louisiana for a potentially better deal in Texas—a decision more than 200,000 Louisiana residents have made over the past 20 years—they typically take their tax burden into account.

A tale of two states

Where the difference comes is in what Texas gets for its money, and it certainly appears to get more. Better roads. Better schools. Better health outcomes. This, in part, is due to the difference in the way the state government is structured.

Texas is highly decentralized and the distinction between the responsibilities of state and local governments are far clearer, especially compared to the muddled concoction Louisiana created during the heyday of its populist past. Quite simply, local governments have more authority and autonomy in Texas, while power in Louisiana disproportionately resides in the State Capitol.

“I think businesses and people here look at Texas and what they’ve had and what they done with it, and there’s a certain amount of jealousy” says political pollster Bernie Pinsonat. “We’ll never get away from that. But people need to realize, they have a totally different style of government. In Louisiana, all the power goes to the governor. If you want something done in Houston,  you don’t have to go to the state capitol.”

Also worth noting: Texas is more accepting of independent municipalities—largely formed around school districts—than Louisiana. What’s the better way is a question for academics and policy experts. What is clear is that it has worked in Texas.

“As a general rule, the belief is the closer you are to collection and expenditure of your tax resources the more efficiencies, more accountabilities and more effective means of governance you have,” says Tom Clark, an attorney with Adams and Reese, and past chair of the Committee of 100 for Economic Development, a statewide business round table.

Texas also has a cleaner and more favorable tax structure, which makes it easier to attract business. Though its tax burden is comparable to Louisiana’s, it’s tax climate is considered among the best in the country, according to the Tax Foundation, ranking at No. 14. Louisiana, at No. 41, is one of the 10 worst. That’s due largely to the myriad of exemptions and credits embedded into Louisiana’s tax code.

“In Louisiana, it’s the fiscal structure that is complex and problematic,” says Scott Drenkard, director of state projects for the Tax Foundation. “I’ve heard businesses tell me if they were not already in the state, the sales tax system alone is enough to dissuade them from coming into the state. That has long-term affects in terms of economic development and if you don’t have economic growth, you don’t have a good place to live.”

There are other key differences as well. Texas is bigger geographically and has a population six times larger than Louisiana’s. Its state and local spending is five times greater. Most importantly, its economy, at $1.6 trillion, is the second-largest in the nation and nearly seven time the size of Louisiana’s.

Also worth noting is Louisiana, at 19.6%, has one of the nation’s highest poverty levels, according to the Census Bureau, with 8.8% of residents in deep poverty. Not only does this require more tax dollars go toward social government programs, but, from a pure mathematical standpoint, it also means almost one-in-five Louisiana residents pay little in income and—because of the nation’s highest homestead exemption—property taxes. In Texas, the poverty rate is 15.9% and 6.6% are in deep poverty.

For all those reasons, policy experts like Clark and Scott say Louisiana shouldn’t be so fixated on Texas but, instead, should concentrate on states with more similarly sized economies—which, in the South, includes South Carolina, Alabama and Kentucky.

“Texas is just a bad direct comparison because they empower their local governments to do things differently than we do,” Clark says. “Beyond that, it is much larger and has a much larger population. It has a different coastline. It’s very different, and it is not an effective state to compare us to for any of our needs.”

As a practical matter, that means the state shouldn’t be spending as much time focused on trying to match Texas with incentive packages for big chemical plants, for instance, as we should be focusing on things like education, infrastructure, tax reform and quality of life factors that attract business and industry to the area.

Scott points to Albemarle’s recent announcement that it is pulling its 200 remaining workers out of downtown Baton Rouge and moving them to North Carolina, where it relocated its corporate headquarters nearly two years ago, as an example of why it’s important to look not just at Texas but to other Southern states that are beating us in areas where we should be competitive.

“What do we, and should we, learn from this?” Scott asks. “Why wouldn’t a chemical company headquarters be a perfect fit for the capital city of Louisiana? It’s worth asking ourselves that question, and to be willing to listen to the actual and maybe painful answers.”

Scott muses those answers might include the fact that Charlotte has a hub airport, a better trained workforce, and better schools—factors that don’t neatly fit into a comparison based mainly on the tax bases of the two locations, though North Carolina did recently revamp its tax code to make it more business friendly. In other words, areas where Louisiana could be focusing its efforts and resources but is not.

Of course, the petrochemical industry and its needs for the oil and gas resources along the Gulf Coast will always keep Louisiana somewhat tied to and in competition with Texas. Its geographic proximity will also continue to make it an attractive locale for Louisianans, who either choose to leave for greener pastures or are forced to by the large employers that periodically relocate their workforces to places like Kingwood and The Woodlands.

Still, as Louisiana policy makers and economic development officials ask themselves hard questions about how to move this state forward, perhaps the best place to look for answers and examples of how to do it right is not to our neighboring state to the west but to other states elsewhere in the country.

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