It was a busy time last week in Baton Rouge, where legislators on Monday and Tuesday heard testimony on Governor John Bel Edward’s (D) proposed gross receipts taxA gross receipts tax is a tax applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. , dubbed the “Commercial Activity 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. ” (CAT). The bill ultimately was withdrawn (voluntarily deferred) by its sponsor, as covered here by Maria Koklanaris at State Tax Notes:
[Rep.] Jones pulled the bill after two days of overwhelmingly negative testimony before the 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. . Representatives from the oil and gas industry, the supermarket industry, the chemicals industry, and a small business association testified that paying taxes on every sale they make would be crippling.
Scott Drenkard of the Tax Foundation, which has criticized the CAT idea for poor structure and design, told the committee that “all gross receipts taxes are undesirable due to the phenomenon they create called ‘tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. ,’ or taxes on taxes; the structure of this gross receipts tax is uniquely complex in its administration and calculation.”
Part of the reason for the complexity of the CAT in H.B. 628 was Edwards’s attempt to make it more palatable by including various exemptions. The final amendments to the bill, put in the day it was killed, would have exempted passthrough business income. Previously, the bill contained a separate tax structure for passthroughs. But that did not help H.B. 628’s prospects — it may have even made them worse by sharply lowering the amount of revenue the bill was expected to create. The original bill, filed April 17, was estimated to bring in at least $800 million. By the time all the amendments were added, that expected revenue was down to less than $300 million.
There is some question about where the state will go next. Legislators could close out the current session by passing a standstill budget; however, next session the budget gap will open up to $1.3 billion as the temporary 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. increase known as the “clean penny” expires mid-2018. Legislators will have to either address that issue this session, or wait to call a special fiscal session in 2018.
In my testimony to the House Ways and Means Committee on Tuesday (video here starting at 10:45), I suggested looking to expand the 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. to consumer services, and looking at unifying the base of the state’s 4 percent sales tax with the 1 percent sales tax (the two operate in practice as different taxes, applying to a different basket of transactions). If the state sufficiently broadens the sales tax base, rate reductions might be possible while still bringing in the same amount of revenue as under current policy.Share