Gov. John Bel Edwards unveiled a tax reform plan Wednesday that ensures he will encounter stiff opposition from conservative Republicans and the business community. However, he calls it the only logical solution for Louisiana’s constant budget troubles and its broken tax system.
Edwards abandoned an earlier corporate tax on sales that most folks didn’t understand and replaced it with what he calls a commercial activity tax.
Although Edwards earlier appeared to abandon some major recommendations of a task force studying budget and tax reform, they are now part of his recommended solution for repairing the two broken systems.
Taxpayers will like his decision to let the additional 1 percent state sales tax increase expire on July 1, 2018, but not some of his other sales tax proposals. One would clean the existing 4 percent state sales tax of too many exemptions and another would apply the tax to more services like cable and satellite television, security services and landscaping.
Upper income citizens who pay most of the state’s income taxes would see lower tax rates under Edwards’ plan. However, they would be asked to give up their ability to deduct federal income taxes paid on their state income tax forms. Voters would have the last word on that one.
Those who pay corporate income taxes would also see lower rates, but they would have to give up their federal deductions as well. Voters rejected a similar plan last November.
Reforming the tax system is difficult because Republicans don’t like income taxes, and Democrats don’t like sales taxes. However, both taxes provide the majority of revenues for state government operations.
The state has a $29 billion budget, but half of that is federal money. The Legislature has only about $3.5 billion to appropriate because laws or constitutional amendments dedicate much of the other half. That is why health care and higher education have borne the brunt of budget cuts. Neither is protected.
Eliminating some of those budget dedications protected by law would be a great place to start producing more revenues. Tax breaks totaling $6.8 billion annually also need to be evaluated and unproductive ones eliminated.
The commercial activity tax (CAT) is the new wrinkle that wasn’t part of the task force recommendations. It would raise an estimated $900 million a year from businesses. That is what is needed to replace the $880.6 million raised by that 1 percent sales tax that is going off the books.
The Associated Press reported the CAT would apply to businesses making more than $1.5 million annually, calling it a tax on sales without looking at expenses or profit margins. The state Department of Revenue said 94 percent of the companies in Louisiana are making less than $1.5 million annually, and they would pay a flat tax ranging from $250 to $750.
The Louisiana Association of Business and Industry (LABI) was quick to pounce on that idea. Jim Patterson, the association’s tax council director and vice president for government relations, said business is paying more than its fair share of taxes today.
“To allege otherwise is absolutely false,” Patterson said. “Employers in Louisiana pay the majority of property taxes in this state. Employers pay both individual and corporate income tax. Employers pay half of all sales taxes in the state — at the highest rate in the nation.
“Employers pay a franchise tax and an inventory tax in Louisiana, which most states don’t have. Employers pay excise taxes like severance and gas tax. It’s time to put political rhetoric aside and look at the facts.”
Edwards quoted the revenue department that said there were 149,000 corporate tax filers in the state in 2015 and more than 129,000 of those paid no taxes to the state of Louisiana.
The governor said his proposal is trying to make sure businesses pay their fair share so that funding government services doesn’t fall on individual taxpayers, like middle-class households.
LABI counters that Louisiana has lost 25,000 jobs since the peak of the economy in 2014 and that employers and families are struggling to stay afloat. Stephen Waguespack, CEO of LABI, said the governor’s latest tax proposal “seems tone deaf to economic reality.”
Like Republican conservatives, LABI believes cutting state spending can solve budget problems. However, when it comes to deciding exactly which programs should be cut or eliminated, few have any concrete suggestions.
The Legislature’s problem beginning April 10 is producing $400 million needed to eliminate an expected deficit. Edwards also wants them to raise enough money to fully fund the TOPS scholarship program, K-12 education and long-delayed pay increases for state employees.
Tax Foundation, a national tax research group, calls the state’s sales tax system “easily the most complicated sales tax system in the country.”
A second state group is trying to modernize the sales tax system but is frustrated over the inability to get different stakeholders to agree on what to do.
“We’re trying to heal a fractured system,” Rep. Julie Stokes, R-Kenner and chairman, said. “If people are resistant to everything, there’s no way to bring the system into line.”
Therein lies the problem — resistance to everything — that has created the state’s annual nightmare of bad budgeting and an outdated tax system long overdue for change.
Edwards has challenged members of the Legislature to have the courage this year to make the bold reforms necessary to put the state’s financial house in order. As you can see from the early feedback, that is a mighty tall order.