Weeks ahead of the legislative session that kicks off on April 10—and during which Gov. John Bel Edwards hopes to reform Louisiana’s tax code—the Edwards administration caught policymakers and business groups off guard by floating a new plan that would replace the state’s corporate income tax with a corporate tax on sales.
Few details have been released, but the idea behind a corporate sales tax, also known as a gross receipts tax, is to create a broader tax base with a lower rate. Removing the corporate income tax should eliminate exemptions, credits and loopholes some businesses use to get around paying taxes.
While awaiting more details on the governor’s plan, which Edwards planned to outline publicly on March 27, interest groups on both sides of the aisle are already voicing concerns over the proposal.
“Everyone is trying to get more information as to what this entails,” says Stephen Waguespack, president and CEO of the Louisiana Association of Business and Industry. “This was a last-minute change on their part. We’ve reached out to partners in other states, and we’ve received troubling feedback so far.”
The tax has been implemented in at least four other states. Louisiana would model Ohio’s receipts tax, which imposes a 0.26% tax on sales for businesses with gross receipts of at least $150,000 a year.
A gross receipts tax could multiply the tax impact down the line, all the way to the consumer, Waguespack says. If a business is taxed on the front end for every dollar it spends on goods and equipment, without deductions or credits for those expenses, those taxes trickle down into the cost of the finished product, he says.
Louisiana Budget Project Director Jan Moller says the answer isn’t getting rid of the corporate income tax, but making it more effective and broadening the base.
“Our concern based on what we’ve learned is that the tax would be quite regressive, meaning the poor would be hit harder than the rich,” says Moller. “That’s the general problem with sales tax.”
In the upcoming session, legislators must tackle the recurring budget crisis and offset $1 billion in temporary taxes set to expire in 2018. For this purpose, the Legislature created the Task Force on Structural Changes in Budget and Tax Policy, which released its tax code recommendations in January. A gross receipts tax was not among the group’s suggestions.
Dawn Starns, state director of the National Federation of Independent Business, says the tax could have an adverse impact on small businesses, especially those just starting out. If a natural disaster strikes, affected businesses still have to pay taxes on sales and often cannot offset losses under a gross receipts tax.
“If a small business is just starting out and has a bad year, you’re taxing them on receipts before they make profits,” Starns says. “How do you justify that?”
In Ohio, the tax passed as part of a major tax reform package in 2005. In Louisiana, Starns contends the tax is cherry-picked to fit the governor’s purposes.
“We feel like this is another money grab,” she says. “This is not reform. This is, ‘What else can we throw out to see what passes?’”
The Edwards administration has also indicated it does not plan to change the inventory tax credit program, which Waguespack says is good news. Otherwise, LABI is reserving its assessment on the governor’s tax plan as a whole until all details are made known.
“We don’t want to rush to judgment,” he says. “We’re ready to vet the plan once it’s released.”