Hot off the presses. We’re reading this pretty much at the same time you guys are…
At a joint meeting of the House Ways & Means Committee and the Senate Revenue & Fiscal Affairs Committee, Governor Bobby Jindal unveiled his administration’s proposal to eliminate income taxes and stressed that the proposal will lead to more job opportunities for Louisianians. Following months of meetings with legislators and stakeholders across the state, Governor Jindal presented a plan that eliminates income taxes in a revenue neutral manner by eliminating over 200 tax loopholes and broadening the state sales tax base.
The Governor stressed that the tax reform proposal will make Louisiana the best place in the country to create jobs. Governor Jindal said, “Over the past five years, we have overhauled our ethics laws, revamped workforce development programs, eliminated burdensome business taxes and passed landmark reforms to help give every child in Louisiana the opportunity to get a great education.
“Everything we have done since entering office is about making Louisiana the best place in the world to find a job and raise a family. Our state is now at the top of many rankings for the best business climates in the country and we are competing for and winning major economic development projects. But we need to do more to stay competitive. States with no income taxes are outperforming other states in terms of economic growth and population growth.
“Over the last ten years, more than 60 percent of the three million new jobs in American were created by the nine states without an income tax. Every year for the past 40 years, states without an income tax had faster growth than states with the highest income taxes. Economic growth in the nine states without income taxes was 50 percent faster than in the nine states with the highest top income tax rates. Over the past decade, states without income taxes have seen nearly 60 percent higher population growth than the national average.”
Governor Jindal continued, “While we have reversed the more than two-decade problem of out-migration, we can do more to keep people here. Here are a couple of staggering statistics. Between 1995 and 2010, according to IRS data, Louisiana lost $3 billion in adjusted gross income to Texas. Over that same time period, Louisiana lost over $6 billion in adjusted gross income to other states. Louisianians deserve better. In order to increase Louisiana’s competitiveness and make our state even more attractive for companies who want to invest and create opportunities in Louisiana for our people, we must overhaul our tax code.
“It’s even bigger than that though. The rankings and statistics are important, but think for a moment about the family and friends you know who are out of work or living in another state because they can’t find a job here in Louisiana.
“There are still many Louisianians looking for work. There are still too many Louisianians that are underemployed. And there are still too many Louisianians living in other states because they couldn’t find work here. Our plan will keep Louisianians here and help bring our sons and daughters back home to find good-paying jobs and raise their families.
“We have become competitive with the rest of the country and world for economic development projects, but we can’t rest on our laurels and sit by while other states transform and take our jobs and our people. If we want to more of our people here and bring the jobs of the future here, we have to step up and compete.”
Governor Jindal said his administration’s tax reform plan would also have six benefits. The Governor said, “First, eliminating income taxes will give more control to the taxpayer. Taxing what people spend instead of what they earn gives taxpayers more control over their own money. Second, eliminating income taxes will make Louisiana the best place to start a business. This is the best way to grow our economy and create good-paying jobs throughout the state.
“Third, in our plan, everyone will pay their fair share, but no more than that. Fourth, our plan will close special interest loopholes. Powerful special interest groups will no longer be able to rig the system. For far too long average Louisiana citizens have felt the state’s tax code works for the rich and powerful, but not for them. By closing special interest loopholes, we level the playing field for everyone.
“Fifth, we are going to protect food, prescription drugs and utilities from increased sales taxes. Sixth, and finally, by switching to a state sales tax base, there will be more stability in funding for government services. Stability breeds confidence. Switching to a more stable tax base can smooth out many of the rough edges and stabilize state budgeting, and stability in government attracts businesses and creates good jobs.”
Background On Tax Reform Plan
The proposal will create a simplified tax system to accelerate job creation and business growth in Louisiana. Despite one of the lowest state/local tax burdens in the country, Louisiana’s tax structure often is poorly perceived because of its complexity. By levying nearly all major tax types including personal and corporate income taxes, Louisiana’s current tax climate results in competitive disadvantages for businesses and individuals by penalizing hard work and increased earnings.
The plan will transform Louisiana’s tax system into a model that is simple, stable, and modern. The plan will eliminate two major tax types: personal income tax and corporate income and franchise tax. Eliminating income taxes in a revenue-neutral manner and improving sales tax administration will dramatically simplify Louisiana’s tax system and reduce administrative problems for families and small businesses. The effective start date of the program is January 1, 2014.
The plan will ensure revenue neutrality by:
- Eliminating~$2.7 Billion in personal income tax and corporate income and franchise tax
- Eliminating over 200 exemptions, resulting in $114 Million in additional revenue
- Broadening the state sales tax base and raising the state rate to 5.88%, which will result in ~$2.1 billion in revenue
- Maintaining vital local tax offsets and business competitiveness incentives
- Implementing targeted tax offsets, including a change in the cigarette tax rate, and tightening severance tax exemptions
To keep the sales tax rate as low as possible, the plan will expand the sales tax base to many services that are already taxed in other states in addition to eliminating over 200 current exemptions. Many of these exemptions are no longer relevant since they were related to the personal income tax and/or corporate income and franchise tax.
Reducing the number of tax exemptions has many benefits, including limiting the state sales tax rate increase required to generate sufficient revenue and greater stability in revenues. The sales tax exemptions retained under the plan will help protect low-income residents and also preserve Louisiana’s business competitiveness. These include:
- Constitutionally protected sales tax exemptions, including food for home consumption, residential utilities, prescription drugs and fuel.
- Manufacturing, machinery, and equipment (MM&E), non-residential utilities, farm and agriculture, drilling rigs, vessels greater than 50 tons, tangible personal property for lease or rental, manufacturers’ rebates and trade-in value on new vehicle purchases, and preservation/rehabilitation of historic structures.
- Exemptions for vendors compensations
- Exemptions for certain non-profit organizations (religious, military, disabled)
- Sales tax exemptions on purchases whose cost is already borne by the taxpayer: those made by federal, state and local governments.
The services added to the state sales tax base include personal, professional and other services that are currently excluded from the state sales tax base. The services that will be excluded include healthcare, education, construction, real estate, financial services, legal services, oil and gas services, and funerals. The purchase of advertisement (“buys”) will be excluded. The plan will also protect small service providers by creating a “de minimis” exemption that will exclude any service providers with annual revenue under $10,000. The plan will also modify some severance tax exemptions.
As part of achieving simplification of Louisiana’s tax structure on a revenue neutral basis, Louisiana’s excise tax rate on cigarettes ($0.36) would rise to match the Texas rate ($1.41), factoring in a 40 percent discount for behavioral changes. Additionally, the current variable rate for other tobacco products would rise to match the Arkansas rate of 68 percent of manufacturer’s price.
The proposal will include a tax amnesty plan. Tax amnesty will help accelerate collections for delinquent accounts for individuals and businesses related to tax types that are proposed for elimination and also help foster the transition and implementation into the new tax structure.
Protecting Louisiana’s Families and Retirees
To ensure that Louisiana families at all income levels will be better off under the plan, the plan includes targeted relief to retirees and low-income working families. The plan protects low-income families and retirees who pay little or no income tax currently by creating the Family Assistance Rebate Program (FARP) and Retirees Benefit Program (RBP).
FARP compensates low income households based on the impact of the increased sales tax over any benefit from the reduction of income taxes. RBP provides a rebate for eligible retirees (including municipal, state, federal, Social Security/disability, private sector) that have less than $60,000 adjusted gross income that will compensate them based on the impact of the increased sales tax over any benefit from the reduction of income taxes. This will help ensure that these retirees are not made worse off since they don’t pay income tax today.
Internet Sales and Compliance and Simplification of Tax Administration
The plan creates a uniform sales tax base for “remote sales,” i.e., sales made by vendors not physically located in Louisiana, and creates a Louisiana Sales Tax Commission to act as collector, auditor, interpreter, and rule-maker around state and local sales tax.
Congress is currently considering legislation that would require states to compel remote sellers to collect and remit sales tax. Should that legislation pass, Louisiana should be ready to require remote sellers to collect and remit sales tax. However, a condition of that legislation is that a state must have a single collector, auditor, and interpreter of the law, and uniform base for remote sales. Louisiana is one of four states that does not have a unified local and state sales tax collection process.
Under the plan, the Louisiana Sales Tax Commission would be made up of state and locally nominated gubernatorial appointees that would be confirmed by the Senate. The Commission would contract with local collectors, of which there is currently one in each parish, to perform collection and auditing services on behalf of the Commission.
The Commission would create a uniform sales and use tax return that will significantly reduce the burden of sales tax administration on business. Building on the Parish E-file system, this simplified return would benefit from the single remote sales tax base and unified oversight entity.
If Congress passes legislation that permits states to require remote sellers to remit sales tax, the state sales tax rate will drop below the proposed rate due to an expected substantial increase in revenue.
Louisiana Tax Court
Under current law, tax disputes on the state level are resolved by the Board of Tax Appeals and those on the local level must be pursued in district court—or courts, plural if the issue crosses parish lines.
Six states have judicial branch tax courts and 22 have independent tax tribunals. Of those states, Oregon’s Tax Court came closest to the model court established under the plan. Oregon, like other states, has proven that an independent judicial branch tax court is not only feasible but extremely effective and efficient.
The plan creates a single Tax Court to hear all types of tax cases. The Tax Court would have jurisdiction over all state and local tax matters. This would create uniformity within the current court system for all state and local taxes.
The Tax Court would consist of three elected judges. One judge would serve the 1st circuit, one judge would be shared between the 2nd and 3rd circuits and one judge would be shared between the 4th and 5th circuits. On issues relating to sales tax, only those that had been previously arbitrated by the Uniform Sales Tax Commission would be eligible for appeal to the Tax Court. After final decision from the Tax Court, cases could be appealed to the Court of Appeal or Supreme Court.