As the Legislature convenes for another legislative session – this one focusing on fiscal matters – there will be a great deal of discussion about taxes, but it appears the state budget will once again end up being issue number one.
That’s despite the fact that over more special sessions than most would want to remember, lawmakers renewed a portion of an expiring sales tax with the intention of bringing stability to the budget for an additional seven years.
The fact that two competing budget bills have been filed and neither is the traditional House Bill 1 says it all. So, with the Revenue Estimating Conference at a stalemate over how much money it will say the state has to spend, it looks like lawmakers have again found something to fight about with the budget.
In the meantime, there have been a lot of tax bills filed. Many of them seek to make structural improvements that would make our tax system more competitive. Some head off into a direction we probably shouldn’t go. And others seek to allow for taxation of things we haven’t really done before. So, here’s the rundown.
Sales Taxes
- Single Sales Tax Collector: This is a constitutional amendment to allow the Legislature to provide by statute for a single sales tax collector. This is a positive reform that CABL has long supported.
- Sales Taxes for Transportation: The .45% sales tax passed by the Legislature in 2018 goes to the State General Fund for the general operations of government. It was put in place for seven years. This bill would phase in a dedication of those revenues to the Transportation Trust Fund each year until the tax is set to expire. While the state certainly needs to invest more in transportation infrastructure, CABL has concerns about reducing State General Fund Revenues to do that.
- Uniform Sales Tax Base: When the Legislature raised the temporary fifth penny of sales tax in 2016, lawmakers also temporarily “cleaned” or removed various exemptions from the other four pennies of sales tax to make the entire sales tax base more uniform. This was a reform designed to clean up a hodgepodge of exemptions that were confusing and applied inconsistently across the various pennies of the tax. It was also a recommendation of the HCR 11 Task Force, state economists, and the Tax Foundation. This clean-up is set to sunset in 2025 and this bill would remove that sunset. CABL has concerns about reverting back to a sales tax base that would become less uniform than it already is.
- Dedicate Some Sales Taxes to Transportation: This legislation would dedicate all state sales tax collections over $4 billion into the construction subfund of the Transportation Trust Fund. The current revenue forecast for sales tax collections in Louisiana is just over $3.9 billion. Sales taxes are the state’s single largest source of revenue. Diverting all future growth of that source away from the State General Fund would lead to more budget chaos and make higher education and health care vulnerable to even more budget cuts.
- Sales Tax Holidays: Louisiana formerly had three major sales tax holidays until budget issues forced their temporary suspension. There are various bills to reinstate them in one form or another or combine them into one major three-day sales tax holiday.
Income Tax
- Individual Income Taxes: There are a number of bills that deal with individual income taxes that generally follow the recommendations made by the HCR 11 Task Force. Currently Louisiana income is taxed in three brackets of 2%, 4%, and 6%. The 6% rate is considered on the high end in our region, but we have two deductions most other states do not have – deductibility of federal taxes paid and excess itemized deductions – that bring our effective tax rate down considerably. These bills attempt to address that high 6% rate, generally, by removing the federal tax deduction and the excess itemized deduction and going to a modified flat tax well below the 6% rate. Income below $12,500 for individuals is not taxed, but everything above that is taxed at a flat rate of either 3.28%, 3.95%, or 4%, depending on the bill. It is unclear what the revenue impact for state government would be, but CABL has been supportive of this approach to simplify our tax structure and make it more competitive.
- Corporate Income Tax: Louisiana currently has brackets for its corporate income tax of 2%, 4%, 6%, and 8%. The 8% rate stands outs as particularly high compared to almost anywhere else in the country, but again, as with the individual income tax, we have a very large deduction of federal taxes paid, that brings the effective rate down significantly. These bills go about doing things in different ways, but generally they eliminate the federal tax deduction and change to a flat rate of anywhere from 3.95% to 6%. This is another approaching to reducing rates that CABL has been supportive of.
- Corporate Franchise Tax: The corporate franchise tax is a method of taxation that is falling out of favor in most states, and the ones that still have this tax have a much more modest version than Louisiana does. Ours is considered a particularly onerous tax policy because it’s a tax on capital assets regardless of income and can place an undue burden on some companies based simply on how they’re structured. The proposals in this session would basically phase out the corporate franchise tax over five years. Getting rid of the corporate franchise tax would be a positive move, though CABL has usually supported it in the context of a more holistic reform that would be relatively revenue neutral for the state.
- PILOTs: PILOT is an acronym for payment in lieu of taxes. Generally, it’s a mechanism used in many states that allows a local government to negotiate with a company or property owner in the parish to get upfront money while a project is under construction in lieu of property taxes that would be payed later. Typically, in Louisiana, this might involve construction of a new project that qualifies for an industrial tax exemption, where the local government would receive little or no revenue in the early years because of the exemption and have to wait several years before taxes could be collected on the property. Sometimes, when there are immediate needs, that puts local governments in a difficult position. With PILOTs, a local governmental agency could negotiate upfront payments from the company in exchange for a reduced tax rate later on. This legislation is being brought because of recent legal decisions surrounding the use of PILOTs in Louisiana. PILOTs are not limited to industrial applications and could be used with any type of business. CABL has been supportive of this option to provide more flexibility for local governments when it comes to property taxes.
Industrial Tax Exemption (ITEP)
- There have been well-known issues with the ITEP program since local governments were given a great deal of control over granting industrial tax exemptions. The bills filed to address those issues generally grant a seven-year exemption on 80% of the property taxes that would be collected from the project or expansion. Instead of local entities controlling the process, three local governing authorities would sit on a committee to review the ITEP application. Their recommendation to approve or deny would then be sent to the Commerce & Industry Board for a final determination. The local authorities would be able to serve in voting positions on the board representing their particular jurisdiction, but a final decision on whether to grant the exemption would be made by the board.
Inventory Tax
- The inventory tax is a local property tax on a company’s inventory. It is a form of taxation that has fallen out of favor over the years in many places. Yet, local governments in certain heavily-industrialized areas receive a significant portion of their revenues from the tax. State leaders acknowledged a number of years ago that the inventory tax was a hinderance to economic development. They didn’t want to eliminate the tax because of the dependence so many local governments had on it as a primary source of revenue, so instead they created a state tax credit whereby companies would pay the local inventory tax and then the state would essentially reimburse them with a state tax credit. Over the years that credit grew to hundreds of millions of dollars in expense to the state and when the budget problems of the last decade hit, the inventory tax credit stood out. A few years ago, that credit was reduced by 25% as a way to save the state money. Legislation this session would essentially eliminate the inventory tax by making inventory exempt from local property taxes. That would take significant revenues away from several parishes that rely heavily on that income source, but it would also eliminate the need for an expensive state tax credit. This is an issue that needs to be addressed, but a more holistic solution is called for.
Fuel Taxes
- The proposal for the gasoline has a number of elements to it. Basically, it raises the gasoline tax by 6 cents immediately, and then goes up 2 cents every two years until 2031. That would raise the state portion of gasoline tax from the current 20 cents to 34 cents. An increase in diesel starts at 4 cents immediately, and then goes up 2 cents every two years until 2031. It also includes a $300 annual fee on electric cars and $200 on hybrids. These dollars go into the Transportation Trust Fund subfund, which was recently created by a constitutional vote and can only be used for the direct expenses of projects. It cannot be used for any DOTD administrative expenses. It would also begin a phased shift of 8 cents of the current gasoline tax from the Transportation Trust Fund to the subfund, again meaning that that additional portion of state gasoline taxes could only be used on direct infrastructure projects. CABL has been supportive of increased investment in transportation infrastructure and believes this is a good starting point for debate on this issue.
Sports Betting
There are a couple of bills dealing with legalizing sports betting. Both involve local option elections that would allow such betting in the land-based casino, riverboats, and racetracks where it was approved by voters. One bill simply adds sports betting to the current list of approved means of wagering, another levies a specific 8% tax on proceeds and dedicates half to the State General Fund and half to early childhood education.
Homestead Exemption
- Local Option to Adjust Homestead Exemption: This would allow a local governing authority to reduce the Homestead Exemption on homesteads if that reduction is approved by voters parish wide. It contains a mechanism that adjusts millages in the first year to ensure that homeowners would not see any major spike in taxes, but those taxes would go up over time. This mechanism could not be used to raise the Homestead Exemption beyond its current level, only lower it. It’s foreseen as a way to broaden the tax base in a parish with approval of voters and give local governments more flexibility to raise revenues on projects that might have a broad public support. CABL has been supportive of efforts to provide more flexibility for local governments and perhaps begin to reduce some of their reliance on state revenues.
- Lower Homestead Exemption: This constitutional amendment would lower the Homestead Exemption from the commonly-used level of $75,000 to $10,000.
Marijuana
- There are a couple of bills that would place specific taxes on medical marijuana. One would be a 15% excise tax at the wholesale level that’s dedicated to a wide variety of causes. Another is a 7% tax on gross sales dedicated to the waiver program for individuals with developmental disabilities. If additional revenues are raised through one of these means, CABL does not believe a new dedication should be created.
CABL will also be monitoring a number of other bills this session, particularly in education, and will have further updates throughout the coming weeks.