Louisiana’s fiscal system desperately needs administrative improvement. In particular, lawmakers should consider removing multiple duplicative tax regimes by unifying state and local sales tax collections, tax administration, and tax bases under an independent, state-local commission.
By Liz Malm,
Scott Drenkard, Jared Walczak and Joseph Henchman
Executive
Summary
Louisiana
convened its 2015 legislative session with seemingly insurmountable problems: a
$1.6 billion budget shortfall, difficult-to-navigate funding dedications, and a
governor who pledged he wouldn't increase taxes. If that combination seems
intractable, it was— the session closed with a patchwork of short-term,
temporary fixes to plug the budget hole with promises that legislators would be
back in the next legislative session to focus on fiscal issues. Louisiana has
reached a fiscal reform crossroads.
While the most
recent legislative session shows that short-term budget fixes are not tenable,
the exercise pushed many to ask the right questions. How can the tax and fiscal
system be updated to reflect a changing economy? Why, in the midst of economic
expansion, are tax collections failing to meet the state’s needs? Over the
course of five months, our team of tax economists met with stakeholders from
all walks of Louisiana life, including small business owners, local government
officials, trade associations, industry representatives, state officials across
the political spectrum, and ordinary taxpayers.
We also reviewed
the history of the fiscal system, previous tax reform studies, and historical
revenue and economic trends. The result is this book, which is meant to help
Louisiana achieve the goal of true fiscal reform—reform that benefits all
taxpayers by addressing the many long-term hurdles the state budget has faced,
finally bypassing the need for temporary fixes. It’s meant to start the
conversation about what Louisiana does well, but also what it could do
better—by recognizing strengths, diagnosing challenges, and prescribing real,
workable solutions. We undertook this project as an independent national
organization familiar with tax developments in many states, with the view that
tax systems should adhere to sound economic principles. We formulated these
recommendations in the spirit of providing useful information and observations
for Louisiana policymakers, journalists, and citizens as they evaluate the
state’s fiscal system.
During our
meetings, several themes arose:
Louisiana needs
a tax structure that mitigates the volatility of the economy and current fiscal
system, providing revenues that grow with the economy. The state economy is
diversifying, and the tax system needs to reflect this new
environment—something that the current tax code does not.
The Louisiana
fiscal system faces a long term structural deficit. Any changes to the tax code
need to address this reality so that the state no longer requires short-term,
temporary fixes to plug unexpected budget shortfalls each year. Louisiana
lawmakers, both state and local, require an increased degree of flexibility in
raising revenue and cutting costs. For example, state legislators are limited
by the high level of dedications in the state’s fiscal system, while local
officials are hindered as a result of strict state-imposed limitations on
raising revenue. These problems and their implications deserve thoughtful
deliberation.
Louisiana’s
fiscal system desperately needs administrative improvement. In particular,
lawmakers should consider removing multiple duplicative tax regimes by unifying
state and local sales tax collections, tax administration, and tax bases under
an independent, state-local commission. By doing so, the state would be able to
take advantage of increased sales tax revenues collected on remote transactions
when federal online sales tax legislation is inevitably passed.
Most of the
state’s taxes suffer from narrow bases. Some of this problem stems from the
partial repeal of the Stelly Plan, but it has also been exacerbated by the
generous use of tax incentive programs, the shifting nature of consumption from
brick-and-mortar stores to online venues, and the failure of the sales tax to
apply to services, which are a large and growing share of the American economy.
While base expansion is a laudable goal, it should be done carefully to ensure
economically detrimental changes are not enacted.
Above all, the
tax system should retain elements that ensure Louisiana improves its
competitiveness in both the national and global arena.
The Committee of
100 commissioned the Tax Foundation to prepare this review of the Louisiana tax
system and recommend possible solutions. While they supported our study,
neither the Committee nor any of its sponsors directed this analysis or any of
the recommendations.
A Menu of Tax
Reform Solutions
Sales Taxes
Louisiana’s
sales tax is one of the most unique and challenging of any in the country.
Business owners note how the cumbersome system is one of the chief tax elements
holding the state back. However, it is also important to acknowledge how
important the sales tax is to local government operation, and to be mindful of
concerns about the impacts of possible changes.
Our sales tax
solutions eliminate duplicative tax collection and administration and simplify
the tax base, making Louisiana eligible for collection of tax on remote
transactions when federal legislation (such as the Marketplace Fairness Act or
the Remote Transactions Parity Act) is enacted.
Moderate base
broadening options are also included.We have provided three different
alternatives for lawmakers to consider, some more expansive than others.
Unification changes are administrative and thus would be revenue neutral, apart
from implementation costs, while sales tax base expansion would increase
revenue. If a net increase or decrease in revenue is desired, the tax rates in
each option can be dialed up or down, respectively, to achieve a tax cut or
tax increase.
Option A: would move Louisiana from one of the most
challenging tax codes in the country to one that is streamlined and has low
compliance costs. It would modestly broaden the tax base as well. Option A
would:
- Unify state and local sales tax collections and audits by creating an independent, joint-run state-local sales tax authority composed of representatives from local tax collection bodies and the state department of revenue. This unified collection and audit commission would make Louisiana compliant with pending federal legislation allowing for sales tax collection on internet purchases.
- Unify state and local sales tax bases on all transactions.
- Expand the sales tax base (state and local) to include select services that currently enjoy exemptions.
Option B: includes some
elements of Option A, but is less comprehensive. It would unify collections and
audits while broadening the tax base (state and local base unification would
not occur under this option). Option B would:
- Unify state and local sales tax collections and audits by creating an independent, joint-run state-local sales tax authority composed of representatives from local tax collection bodies and the state department of revenue. This unified collection and audit commission would make Louisiana compliant with pending federal legislation allowing for sales tax collection on internet purchases.
- Expand the sales tax base (state and local) to include select services that currently enjoy exemptions.
Option C is more
limited, but would still unify the state and local sales tax base with some
exceptions. In addition, it would broaden the sales tax base.
- Unify state and local sales tax bases on all transactions except for food for consumption and prescription drugs.
- Expand the sales tax base (state and local) to include select services that currently enjoy exemptions.
Individual
Income Tax
Our individual
income tax solutions improve the tax code by broadening the tax base and
reducing tax rates, making the state more competitive with its neighbors and
the system more neutral and fair. We have provided three different alternatives
for lawmakers to consider. Each of the following options are designed to be
revenue neutral within themselves. If a net increase or decrease in revenue is
desired, the tax rates in each option can be dialed up or down, respectively,
to achieve a tax cut or tax increase.
Option A would retain
the current three bracket structure, but reduce tax rates. It also includes
base broadening components and resembles the income tax structure recommended
by Dr. Jim Richardson of Louisiana State University and Dr. Steven M. Sheffrin
and Dr. James Alm of Tulane University. Option A would:
- Retain the existing three bracket structure, with rates reduced to 1 percent, 3 percent, and 4.5 percent.
- Eliminate the deduction for federal taxes paid.
- Retain the current Earned Income Tax Credit of 3.5 percent of the federal credit.
- Eliminate excess itemized deductions.
- Retain the existing personal exemption but adjust the tax brackets and personal exemption for inflation.
Option B converts the
progressive income tax into a single, flat rate on all income levels, while
providing additional relief to low-income taxpayers. Option B would:
- Move from three brackets to a single, flat-rate tax of 4 percent on all income levels.
- Eliminate the deduction for federal taxes paid.
- Increase the personal exemption to $10,000 per filer and index it to inflation (maximum of $20,000 per family).
- Increase the Earned Income Tax Credit from 3.5 percent of the federal credit to 10 percent of the federal credit, nearly tripling benefits for low-income households.
- Retain current itemized deductions.
Option C is the most
broad-based option of the three, retaining the single rate structure of Option
B, but eliminating more preferences to bring the overall rate lower. Option C
would:
- Move from three brackets to a single, flat-rate tax of 3.5 percent on all income levels.
- Eliminate the deduction for federal taxes paid.
- Increase the personal exemption to $10,000 per filer and index it to inflation (maximum of $20,000 per family).
- Increase the Earned Income Tax Credit from 3.5 percent of the federal credit to 10 percent of the federal credit, nearly tripling benefits for low-income households.
- Eliminate excess itemized deductions.
Corporate Income
Tax
Our corporate
income tax solutions would make Louisiana more competitive with neighboring
states by bringing its rate from the highest in the region to the lowest among
neighboring states that levy a corporate tax. It also includes base-broadening
elements and helps mitigate tax uncertainty for businesses.
This option is
designed to be revenue neutral. If a net increase or decrease in revenue is
desired, the tax rate can be dialed up or down, respectively, to achieve a tax
cut or tax increase.
This option
would:
- Flatten tax brackets into a single rate of 3.5 percent or 4 percent.
- Eliminate the deduction for federal taxes paid.
- Increase net operating loss carrybacks from zero to three years.
Property and
Related Taxes
Property taxes
are a local levy, and localities depend on their revenue to fund government
functions. While the state has authority over changing the parameters of these
taxes, care must be taken to ensure that any property tax reform be considered
with impacts on local government finance in mind.
Our property tax
solutions broaden the local property tax base and eliminate distortionary and
economically damaging taxes. These alternatives would:
Repeal the
inventory tax and inventory tax credit;
- Permanently limit the total annual value of the industrial tax exemption program to 80 percent.
- Allow localities to approve or reject any extensions of the industrial tax exemption program (that is, the second five-year exemption period).
Additional
Important Improvements
Below, we
provide recommendations that do not fit into the four major tax categories
above, but warrant their own separate discussion. We provide solutions that
would address lackluster transportation infrastructure and prevent budgetary
distress brought on by revenue volatility.
Addressing
Lackluster Transportation Infrastructure
- Increase the excise tax on gasoline and diesel fuel.
- Index the gasoline and diesel excise tax to inflation to keep up with transportation demands.
- Consider further tolling of vital roads and bridges to help pay for repairs and enhancements
- Preventing Budgetary Distress Brought on by Revenue Volatility
- Devote 2 percent of revenues to a rainy day fund each year to make for a healthy nest egg to protect against calls for tax increases during economic downturns.
Our Objective
We hope these
solutions continue the tax conversation in Louisiana by providing a framework
upon which legislators and citizens can make further decisions. The menu of
choices we present all ensure that the state builds a tax system for a
diversified economy and positions itself as a destination for investment,
entrepreneurs, and talented individuals in the years ahead.
About The
Authors:
Liz Malm, Economist
Scott Drenkard, Director
of State Projects
Jared Walczak
Policy Analyst
Joseph Henchman
Vice President, Legal & State Projects
Publication
Details:
The Tax
Foundation is a 501(c)(3) non-partisan, non-profit research institution founded
in 1937 to educate the public on tax policy. Based in Washington, D.C., our
economic and policy analysis is guided by the principles of sound tax policy:
simplicity, neutrality, transparency, and stability.
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