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C100 Vignette Series: #2 Louisiana Sales Tax Structure Needs Attention

Sales Tax is a major component of Louisiana’s revenue stream, bringing in $4.2 billion in state revenues annually, more than any other revenue source. At the same time, our state’s sales tax structure is heavy, complicated and outdated as highlighted in the C100 Tax Foundation report of 2015 and more recently in the HCR11 Task Force report released 2017. Both efforts called for an extensive overhaul of our sales tax regime, exacerbated by the temporary penny imposed in 2016 as a revenue “bridge” to the future intended to expire July 1, 2018. That is a built-in deadline for legislative action--- WE HOPE!
 
Perspective from the Tax Foundation - Sales Tax Increase and Added Complexity
Tax Foundation ranks Louisiana as the worst sales tax structure in the country in our State Business Tax Climate Index. The 4 percent state rate plus 5 percent average local rate is third highest in the country, and the state has some of the most complex interplay between its statewide sales tax and the local sales taxes. It is one of just a handful of states that allows the basket of transactions in the local sales tax to differ from the state sales tax base, causing confusion for vendors and retailers in each of the different parishes. And, though this isn’t a variable in our Index, the parish governments are some of very few in the country that actually collect and audit their own local sales taxes. Most other states have their state revenue department collect those local taxes and disperse them back to localities.
 
Further, all of these provisions have odd timelines, with some taking place immediately, some phasing in next year, and many expiring quickly. Almost every rate is different. We’ve never seen anything quite like it. Bottom line summary of Louisiana’s competitiveness as ranked by the Tax Foundation in its 2017 State Business Tax Climate Index:
 
Buffeted by structural shortfalls and declining revenue, Louisiana policymakers added a penny to the state sales tax, increasing the state rate from 4 to 5 percent while introducing greater complexity to the sales tax base. With the combined state and local rate now approaching 10 percent, Louisiana slipped from 48th to 50th on the sales tax component of the Index, and declined from 36th to 41st overall.
(Note, Louisiana is the only state in the South among the bottom 10 states for tax competitiveness.)
 
More information on the Tax Foundation Tax Climate Index
 
More information on the Tax Foundation Sales Tax analysis
 
 
Perspective from the HCR11 Report
 
Sales tax dependency:
 
The state is dependent upon the sales tax, both general and for motor vehicle sales. Until recently, the
sales tax and the individual income tax brought in about the same proportion of revenue for the state,
but that situation has changed. The sales tax in fiscal 2017 accounts for about 36% of all state sources of
revenue. The next largest source is the individual income tax, at about 26%. Louisiana’s sales tax system
provides more than a third of the state’s revenue despite having features that can be described as bad
tax policy. It features ultra-high rates especially when local sales tax rates are included, an extraordinary
number of exemptions and exclusions, a difference in sales tax bases between the state and local
governments, multiple sales tax collectors and auditors, and multiple sales tax rates within a parish.
 
HCR11 concerns about the Louisiana sales tax system:
 
-At 10% or more, Louisiana has the highest average combined local and state sales tax rate in the nation.
Tourist states such as Florida and Nevada, which do not have an income tax, have combined sales tax
rates of 6.66% and 7.98% respectively in 2016, according to the Tax Foundation. Tennessee, which has
no income tax on salaries and wages, has a state and local sales tax rate of 9.45%. Arkansas has a rate of
9.3% and Alabama is at 8.97%. The Louisiana sales tax rate can have a deterrent effect on business
investment in the state since some of these taxes are paid by businesses.
 
-A high sales tax rate will affect most directly the lower income families. Income in the lowest income groups may be misrepresented by various public assistance programs that enhances a person’s ability to purchase items but do not show up as income. But even from around $20,000 in income, the average family spends about 1% of their income on sales tax while at the higher income scales the average family’s spending on sales tax collections approaches 0.1% of a family’s income.
 
-Parishes, municipalities, school boards, and some sheriffs are heavily dependent on the sales tax
compared to the situation in the great majority of states where local governments tend to be reliant on
more stable property taxes.
 
-The overall high tax rate reduces the flexibility of local governments to generate revenue if necessary,
so conditions tend to force local governments to seek assistance from the state.
 
-The state and local governments do not apply the sales tax to the same items as the state or possibly to
each other, creating a lack of conformity in the state-local sales tax base that is unusual compared to
other states and that also hinders the goal of streamlining the state’s sales tax system.
 
-Lack of state-local uniformity and a highly decentralized collection and auditing system complicates
reform efforts and could penalize Louisiana if Congress passes legislation that would help Louisiana state
and local governments collect sales tax revenue from Internet and shipped sales. Louisiana is only one of
two states that currently have decentralized collection and auditing.
 
-State sales tax policy affecting business -- such as for business utilities and manufacturing machinery –
was reduced for economic development purposes and then has been increased, leaving the private
sector unsure of the state’s long-term tax policy. In addition, the state was not taxing manufacturing
machinery equipment but most local governments do tax it, creating another mismatch between the
state and locals.
 
-The tax code is outdated with regard to sales that once were taxed as tangible personal property but
now are not taxed, particularly digital age purchases of software, data, music, and videos. Taxation of
these items does not necessarily constitute bad tax policy, but a lack of clear modern definitions and
intent is a problem. This is an issue in many states given the dynamics of the market.
 
-Sales tax law needs a recodification to ease compliance, clarify definitions, better distinguish exclusions
from exemptions, and reflect the transactional realities of the 21st century.
 
-Finally, sales taxes are extremely sensitive to major disasters such as the recent flooding in the Baton
Rouge, Tangipahoa and the Lafayette areas and in north Louisiana from Caddo Parish to Ouachita Parish.
Sales tax receipts will increase substantially but these increases do not say anything about the long-term
robustness of the economy.
 
Sales Tax Recommendations by HCR11/Tax Foundation:
 
The Task Force recommends rebalancing so that the individual income tax and the sales tax is structured to provide approximately the same amount of revenue to support the state’s budget as this allows the state to keep the rates for both the sales tax and the income tax as low as our identified revenue requirements allow. This also provides fair treatment across income brackets, because lower income households pay a larger share of their income in sales taxes and higher income households pay a larger share of their income in income taxes. Both taxes grow with the economy; however, the individual income tax has a slightly higher elasticity than the sales tax.
 
HCR 11 Task Force
  • Expand sales tax base
  • Keep items added to sales tax base in 2016 per Act 26 and modified by Act 12 in Second Special Session
  • Add selected services as taxed in Texas
  • Getting rate back to 4% or lower
  • State sales tax raised to 5% in 2016 as part of temporary revenue increases.
  • Uniform tax administration for state and local collections
  • Uniform tax base for state and locals
  • Include business utilities in sales tax base, but rebate manufacturing machinery equipment
 
Tax Foundation/Committee of 100
  • Expand sales tax base, including services
  • (C100 Report pre-dated Act 26 of 2016)
  • C100 did not target rate level, but did note state has one of the highest sales tax rates in the U.S.
  • Uniform tax administration, both collections and audits through state/local commission
  • Emphasis on compliance for Marketplace Fairness
  • Uniform tax base for state and locals

2017 Session – Sales Tax Legislation
 
To date, dozens of tax measures have been filed for consideration. The House Ways and Means Committee has started holding hearings on related subject matters, from sales tax to personal income tax to corporate income tax changes.
 
The Committee of 100 will actively track those bills that align with the goals of the Tax Foundation and HCR11 work and advocate accordingly to advance the stated principles of generating sufficient revenues for state services while making the tax code fair, easy to comply with and competitive with other states.
 
The Task Force full report (released 1/27/17)
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