As states look for a path out of these fiscally troubling times, Louisiana has several options for aspects of its 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. code to promote economic recovery and growth. The Pelican State’s federal deductibility, Corporation Franchise Tax, and 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. structure present opportunities for beneficial tax reform in the wake of the coronavirus crisis.
Louisiana is one of only six states (Alabama, Iowa, Missouri, Montana, and Oregon are the others) that provide some kind of deducibility for federal taxes paid. This is an odd way to reduce a resident’s tax liability, as providing federal deductibility makes a state’s tax code a mirror image of the federal code: things that increase your tax liability at the federal level reduce your state income tax liability, and vice versa.
When the federal government is attempting to lessen the burden on taxpayers, this mirror image penalizes you on the state level for any tax relief provided on the federal level. In addition, Louisiana and other states with federal deductibility have the potential to tax any amount of the $1,200 rebate taxpayers claim on their 2020 taxes (the amounts taxpayers were eligible to receive this year but did not). Although it is unlikely that Louisiana intends to do this, the state will have to exempt these rebates to ensure this does not happen. Instead of retaining these added complexities, the state would be better off eliminating federal deductibility and raising the same amount of revenue with lower rates.
Deductibility is not the only way in which Louisiana is unique. The Pelican State imposes a capital stock tax, the Corporation Franchise Tax. This taxes a business’s net worth instead of its net income. As such, the tax does not take profit or ability to pay into account. Even in the best of times, capital stock taxes depress economic activity. In the current crisis, however, this tax could be especially oppressive to businesses that are struggling to stay afloat. Moving away from such taxes would relieve the burden on businesses hit hard by the coronavirus crisis.
Louisiana relied on sales taxes for almost 43 percent of its tax collections in FY 2017 (latest data available). While such taxes usually remain stable even in the midst of an economic recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. , stay-at-home orders and social distancing requirements mean that people are consuming far less than they would otherwise. Some things they do tend to consume, like groceries,are not included in Louisiana’s 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. .
All states could benefit from expanding the sales tax base to include all final consumption, but Louisiana has an extra roadblock in the way of making this change: the state has one of the most complex sales tax structures in the country, with no unified state and local sales tax base, and no centralized collection agency. Although the state is creating a central collection system for remote sellers, it does nothing to consolidate bases or administration for in-state sellers. Furthermore, the simplified rate system currently in place for remote sellers could end up levying rates higher than those for in-state sellers in certain jurisdictions, giving rise to constitutional questions about discriminating against interstate commerce.
Embracing unity and uniformity in state and local sales taxes would improve the stability of Louisiana’s sales tax collections, allowing the state the freedom to broaden its sales tax base to include consumer services, and to collect taxes on online sales without landing on shaky legal ground.
In the long run, making important changes like reconsidering federal deductibility, moving away from burdensome capital stock taxes, and embracing sales tax unity and uniformity could aid Louisiana on the road toward economic recovery.
Errata: An earlier version of this blog post stated that Louisiana does not tax streaming services. Louisiana taxes a range of digital goods, and while the tax code does not expressly include streaming services, their taxation has been a point of controversy.
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