In mid-March, Louisiana finished its special legislative session that was called to address a $900 million budget shortfall, and the dust is still settling. We’ve been very involved in the state, publishing a book on the state’s tax code at the end of 2015, serving on the state’s Sales Tax Streamlining and Modernization Commission, and testifying in the final days of the special session before the House Ways & Means Committee.
The results of the special session are unfortunately a mixed bag, and a lot more could have been done to improve the state’s taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. system given the stakes.
The short hand summary is that the legislature hiked the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. and made it far more complicated, but also improved some elements of the corporate tax code contingent on a vote of the people in November. The long hand is much more in the weeds—there were a lot of small changes made to try to augment revenue, and also some changes that were results of horse trading. I’ve broken the changes down by tax type below.
Sales Tax Increase and Added Complexity
We rank Louisiana as the worst sales tax structure in the country in our State Business Tax Climate Index. The 4 percent state rate plus 5 percent average local rate is third highest in the country, and the state has some of the most complex interplay between its statewide sales tax and the local sales taxes. It is one of just a handful of states that allows the basket of transactions in the local sales tax to differ from the state sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. , causing confusion for vendors and retailers in each of the different parishes. And, though this isn’t a variable in our Index, the parish governments are some of very few in the country that actually collect and auditA tax audit is when the Internal Revenue Service (IRS) conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return. their own local sales taxes. Most other states have their state revenue department collect those local taxes and disperse them back to localities.
This means more forms to fill out, more taxation offices to interact with, more potential auditors, and multiple different tax bases.
The central proposal of the Gov. John Bel Edwards administration was an increase in the state sales tax by 1 percent to shore up revenue quickly. He proposed what became known as the “clean penny,” a sales tax increase with none of the exemptions that currently exist in the state sales tax. In my testimony in February, I expressed concern that this approach further bifurcated a sales tax system that already has differing baskets of goods at the state and local levels. I suggested “cleaning the other four pennies” of the statewide sales tax—broadening the tax base to make it more neutral across the board. This could either bring in enough revenue that a rate increase wasn’t necessary, or allow the rate increase to be less.
The sausage-making process ended up creating even more bifurcation than anticipated, with the 1 percent increase going through, but the clean penny applying to some transactions and not others, the other four pennies occasionally applying to some new transactions, or just one or two of the four pennies applying.
Further, all of these provisions have odd timelines, with some taking place immediately, some phasing in next year, and many expiring quickly. Last week, the department of revenue, in response to an overwhelming number of questions, released a 25-page guide (or matrix, really) of a variety of transactions and what their sales tax rates would be for the next two months, then the next two years, and the next nine months after that. Almost every rate is different. I’ve never seen anything quite like it:
Tyler Bridges at the Advocate captures this unfortunate result in an article published last week:
“We have made our sales tax system even more confusing,” said Jim Richardson, an LSU economics professor who co-chairs the tax force with Robinson.
“It can’t be any worse,” chimed in Jason DeCuir, a business lobbyist on the panel. “We’re already at the bottom.”
Rueful laughter erupted in the room.
“The Tax Foundation will find a new category for us,” added Richardson, to more laughter.
Corporate Reform Could Bring Louisiana in Line with Competitors
One optimistic thing that passed in the special session was the beginning of some state corporate tax reform. Louisiana has the highest corporate tax rate in the southern U.S., with a multi-bracket system that tops out at 8 percent. The rate is driven upward by an uncommon constitutionally-protected deduction in the state for federal taxes paid. Only three other states have this deduction.
In November, Louisiana voters will face a ballot measure about whether to remove this constitutional deduction for the corporate tax and lower the state’s rate to 6.5 percent, making it equal to Arkansas, which would make the state look a little bit better on this map:
Increases in Various Excise TaxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. es
Other measures that received less coverage were increases in excise taxes on beer, liquor, and cigarettes. These were designed to bring the state into line with averages of neighboring states, but are a one-time fix, and the cigarette revenue, at least, will decline over time necessitating future tax increases or spending cuts.
Many Missed Opportunities
Perhaps the most disappointing element of the special session was that a lot of very good ideas had potential of passing but didn’t. The most of these was the plan championed by Rep. Julie Stokes centered around eliminating federal deductibility in the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. , and consolidating the tax from a multi-bracket system that tops out at 6 percent to a flat 4.3 percent with a generous zero bracket. This plan passed the House, but did not make it through the Senate.
In sum for the session, instead, Louisiana is left with a state + average local sales tax rate that totals to 10 percent (now the highest rate in the country), more structural complexity, and an uncertain passage of corporate tax simplification depending on a vote in November. I am looking forward to seeing what November holds, but more looking forward to revisiting some of the new problems this session created in 2017 during the next fiscal session.
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