Governor John Bel Edwards has unveiled his fiscal proposals for the upcoming legislative session and they are sure to get a lot of scrutiny. Clearly, there are some positive elements coupled with others that are raising cautionary flags. That is no doubt to be expected with any tax proposal. More research and understanding of key details is needed, but the administration’s starting point has emerged and now the legislative process begins – maybe.
The one thing that can be said without doubt is that Louisiana sorely needs comprehensive, long-term fiscal reform. It’s finally come to the point that that should be obvious to almost anyone. The question is, what does that look like?
The governor’s plan has good points. It is certainly necessary from CABL’s perspective to remove the fifth penny of sales tax for a wide variety of reasons that we have stated before. Lowering income tax rates by removing deductions is also consistent with CABL reform policies and makes our tax structure more competitive.
The big question surrounds the relatively new idea to replace most of the revenue lost from removing the fifth penny with revenues generated from what is called a Commercial Activity Tax. Many never saw that coming when news began to trickle out about it a couple of weeks ago and now that a few more details are available, everyone is still trying to figure out just how it would work.
A couple of things can be said about it. One is that it is basically a gross receipts tax, meaning that a company is taxed not on its profits – as in the corporate income tax – but on its sales or gross revenues. Clearly, that can impact different businesses in different ways depending largely on their margins.
Those with low costs do well. Those with high volumes of sales and low margins of profit can be hit pretty hard. There are ways you can mitigate some of those things, but those details are still forthcoming which means everyone is still waiting to see exactly how such a tax would work.
On the positive side the rates on taxes like this are low – in this case.35% – and the base of those taxed is broad. Every business gets captured in one way or the other so tax avoidance is difficult and that provides the state with a fairly stable and predictable revenue source. But only a handful of states utilize this approach and it’s been slammed by tax policy groups on both the right and the left. Questions and details clearly remain.
The future of this particular plan is unclear, but the need to deal with our fiscal issues and enact long-term reform isn’t. In fact, the real question isn’t whether this is the plan to do that, but whether there is the will to do it. If the will is there, there is a reasonable chance that the right plan for Louisiana could emerge. If it’s not, then the Legislature would do well to just say that upfront, acknowledge that they are not going to fix our broken tax structure and spend their time getting the budget right.
That would be unfortunate, but at least it wouldn’t be the waste of time we have sometimes seen in the past. It may also be the precursor to something we’re likely to start hearing more about – a constitutional convention to address our fiscal issues once and for all.