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Louisiana Nearing Big Decisions on Taxes, Tax Foundation Testifies

3 min readBy: Scott Drenkard

Louisiana has a big budget problem this year. The state is a bit bruised from passing perhaps an overly ambitious income 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. cut in 2009 while flush with federal Katrina rebuilding cash, and as the federal transfers have dried up, the state has faced additional complications from then-Governor Bobby Jindal (R) vetoing any revenue increases during his tenure. Add in the recent low price of energy commodities, and the state is currently looking at a $900 million budget deficit this year, and a $2 billion budget deficit next year. Approaching a budget problem that large is really difficult.

At the end of last year, Louisiana elected former state representative John Bel Edwards (D) into the governor’s mansion, and he has put forward a plan that cuts spending and raises revenue to close this gap (the full details of which are here). I think his plan (and the germinating approaches of members of the House Ways and Means CommitteeThe Committee on Ways and Means, more commonly referred to as the House Ways and Means Committee, is one of 29 U.S. House of Representative committees and is the chief tax-writing committee in the U.S. The House Ways and Means Committee has jurisdiction over all bills relating to taxes and other revenue generation, as well as spending programs like Social Security, Medicare, and unemployment insurance, among others. ) are a good start, but I gave testimony yesterday in Baton Rouge to offer ways to improve these measures to make Louisiana’s tax system more simple, neutral, and competitive. Here’s a small snippet from 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. section of my remarks:

The Edwards administration’s central proposal for closing the revenue gap this session is a one percentage point increase to the statewide sales tax, bringing the rate from 4 percent to 5 percent. The administration is correct in noting that in terms of bringing in revenue quickly to solve a budget crisis, the sales tax is your best bet.

The idea of a “clean” penny, as it is called, which would forgo any exemptions, stems from a general perception here that there are too many exemptions and that has made the Louisiana sales tax more complex, less productive from a revenue standpoint, and less fair.

I agree that the Louisiana sales tax is all of these things, but worry that another 1 percent parallel sales tax system with a different 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. stacked on top of the already complex state sales tax raises concerns that the tax would become even more problematic.

Louisiana already has a parallel local sales tax system with different taxable bases in the parishes than in the statewide sales tax, one of just a handful of states which allows this disuniformity between state and local taxes. As we have learned from the proceedings of the Sales Tax Streamlining & Modernization Commission conducted in the off-session, which I sit on, Louisiana has an opportunity at substantial sales tax reform. My hope is that we can improve the system we have, not add a new layer on top of it.

Recommendation: This as an opportunity to improve the existing sales tax base by expanding it to include some services that currently go untaxed. In our book on Louisiana’s tax system, we include a list of services that currently enjoy exemptions in the state sales tax and shouldn’t. This broader base would bring in more revenue, and if an additional penny is layered on top of it, it would have a broader base, but also a congruent base with the current structure.

You can read all of the testimony here. It goes through proposed changes to sales, individual income, corporate income, and excise taxes that are being considered. A number of tax bills were sent to the House floor yesterday, and we will update here as things start to get floor votes. Stay tuned.

Be sure to also check out our whole book on Louisiana’s tax system here.

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