Louisiana Governor Proposes Commercial Activity Tax, Service Tax

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By Nushin Huq

Louisiana Gov. John Bel Edwards (D) has pitched something akin to an alternative minimum tax for companies that would help make money the state will lose when a 1 percent sale tax increase expires next year.

Under the proposal, companies would either pay their corporate income tax or the new commercial activity tax, whichever is higher, the governor told reporters March 29.

The commercial activity tax (CAT) would, if enacted, replace $880 million in revenue that would be lose from the decreased sale tax. It would become effective July 2018 or fiscal year 2019.

In 2015, 129,000 of 149,287 corporate tax filers in Louisiana paid “absolutely nothing” in state income taxes, Edwards said.

“The average middle-class income earner in our state paid more in income taxes than some of the largest companies doing business in our state,” he said.

While discussion around gross receipts taxes like the CAT has increased recently, most states still don’t use them. Nevada has a gross receipts tax as well. Other states facing budget deficits are also considering a gross receipts tax this year, including Oklahoma, Oregon and West Virginia.

CAT Impact

Under Edwards's proposal, companies making less than $1.5 million in gross receipts over the year would pay between $250 and $750 in minimum commercial activity tax. For companies that make zero to $500,000, the commercial activity tax would be $250 a year, Revenue Secretary Kimberly Robinson said.

Companies that bring in $500,000 to $1 million would pay $500, and companies making $1 million to $1.5 million would pay $750, she added.

“That’s it. They won’t pay more in business taxes to the state of Louisiana,” Edwards said.

For entities grossing more than $1.5 million, there will be a commercial activity tax of 0.35 percent of gross receipts or the entity’s calculated income tax, whichever is greater.

Low-Margin Businesses

The administration will present, at a later date, another plan that would address low-margin businesses—companies that have a lot of sales but make little profit. That plan, for which no details were given, would allow a separate calculation to ensure that those businesses “are not asked to pay more than their fair share.”

A gross receipts tax would tax the total gross revenue of a company, regardless of the source, similar to a sales tax. The Edward’s administration sent representatives from the revenue department to talk to taxing authorities in Ohio and Texas about their forms of gross receipts tax.

The commercial activity tax proposal would include a 10-year phase-out of the corporate franchise tax, which would allow businesses to be more competitive in a global marketplace, Edwards said.

Tax Proposal Details

The proposed changes to Louisiana’s tax structure would also lower the personal and corporate income tax rates, expand sales tax base to include services and “clean-up two remaining dirty pennies” so that all 4 percent of the sales tax will have the same exemptions. Exemptions on food, medicine and agriculture will continue.

The proposal also makes permanent the reductions to credit and incentives scheduled to expire in 2018. The state temporarily increased sales tax by 1 percent, and the governor’s plan would also let that increase expire in 2018. These proposals would take place October, 2017.

“This plan needs to be viewed in its entirety,” Edwards said. “This is a comprehensive approach for solving the $1.3 billion fiscal cliff [in 2018].”

The plan would repeal certain credits and exemptions that are “either no longer used or don’t provide enough return on their investment to justify their continued existence,” Edwards said.

Following Texas on Tax

Louisiana would model its sales tax on services on Texas. It would tax services like repairing commercial properties and debt collectors. Unlike Texas, it would exclude tax on internet access, Edwards said. Services represent almost two-thirds of consumption in the state, Edwards said.

“Under the plan I present today, more than 90 percent of individual tax filers in Louisiana today would see an income tax cut,” Edwards said.

Personal Income Tax

The proposed change to personal income tax is overall revenue neutral, though the elimination of the deduction for federal income taxes would affect the higher income tax bracket.

The changes in the personal income tax is revenue negative, Robinson said—about $42 million according to the legislative fiscal office. But corporate taxes would increase slightly, making the proposal to eliminate the deduction for federal taxes in exchange for lower tax rates revenue neutral.

“This is a fiscally responsible approach to bring our system into the 21st century,” Edwards said. “This plan is designed to bring stability by broadening the base and lowering the rates to make sure we can make strategic investments in education, health care, and programs like TOPS [scholarship program] to keep Louisiana’s best and brightest at home.”

Task Force Advice Incorporated

The Louisiana Legislature tackles fiscal issues every odd numbered year. For the past few years, Louisiana has grappled with a budget shortfall. In 2015, the Legislature passed 11 revenue raising bills. While the Legislature wasn’t allowed, under state law, to pass revenue raising bills during the 2016 session, the governor called two special sessions to address the state’s budget problems. Lawmakers increased sales tax under the governor’s “Clean Penny” bill during the first special session. The increase led to Louisiana having one of the highest sales tax in the country, at 5 percent.

The governor’s plan would allow that “fifth penny” to expire. “By doing so, we would no longer have the highest combined sales tax in America,” Edwards said.

The governor and lawmakers want to make structural changes to the state’s tax structure that will broaden the tax base, lower the tax rate and bring in enough revenue. Many of the revenue raising bills will expire in 2018, so if lawmakers don’t make changes, the state could face another budget shortfall. The legislature established a task force to examine and recommend a comprehensive plan to restructure Louisiana’s tax code.

The Task Force on Structural Changes in Budget and Policy, chaired by Robinson and Louisiana State University Economist James Richardson, released an exhaustive report on Louisiana tax and spending in January. Suggestions included personal and corporate income tax reform as well as corporate franchise tax and sales tax. A gross receipt tax was not on the list.

“I am not putting the task force recommendations on the shelf,” Edwards said March 29. “In fact, the overwhelming majority of my plan embraces aspects of the task force report.”

The tax proposal doesn’t include all the task force recommendations and includes a commercial activity tax because the plan needs to have a realistic chance of passing the Legislature, Edwards said.

Approvals Needed

Under the governor’s plan, eliminating the corporate and personal deduction for federal income tax will still need voter approval, but Edwards hopes that exchanging the deduction for a lower tax rate to induce voters to approve the change. He would like both proposals on a single ballot initiative.

The commercial activity tax would require a two-thirds vote to pass the legislature as would any elimination of a tax credit or rebate. If those incentives were simply reduced rather than eliminated, they could pass with a simple majority vote.

While traveling around the state, Edwards said there were very few voices of dissent to his proposals and added that he didn’t receive any proposals from the legislature.

“Our problem is easy to identify,” Edwards said. “We’re operating under a broken outdated structure that simply doesn’t work for Louisiana any longer.”

To contact the reporter on this story: Nushin Huq in Houston at nHuq@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

For More Information

Text of Edwards's proposal is at http://src.bna.com/ntB

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