Editor’s Note: A guest post from Jim Patterson, director of LABI’s Taxation Council.
Taxing business inventory was a major issue during this year’s legislative session. Louisiana’s archaic local inventory tax and the problematic Band-Aid of a state tax credit to offset it both came under fire. But there is another fight over inventory taxation that is currently taking place in Washington, D.C., and its outcome will just as significantly impact Louisiana businesses.
President Obama wishes to abolish a longstanding tax accounting method used by businesses throughout Louisiana and across the U.S. The “last in, first out” method of inventory accounting, commonly known as LIFO, helps companies with inventories to maintain sufficient cash flows to keep merchandise in stock, materials on hand and employees working.
Unfortunately, the president and some in Congress seek to remove this method from the tax code even though it has served well for over 70 years.
Business owners and operators around the country, and in Louisiana, are concerned about the time-consuming and costly consequences arising from having to abandon their trusted LIFO accounting system. They also fear the devastating effects of a substantial, retroactive tax increase that could result.
Hundreds of thousands of American businesses would have to divert monies from their operations to pay more federal taxes. These same businesses would also be forced to pay retroactive taxes on inventory reserve balances they maintain under the current system. These are large and potentially crippling tax increases on Louisiana businesses. Most LIFO users in Louisiana are small companies that sustain our local economies, create local jobs and drive our state’s economic engine.
Changes in a complicated tax code have broad, often unintended consequences. LIFO users would have to revalue their inventory and face a punishing tax increase because of a desire by some in Congress to generate more revenue. However, it is unclear why removal of LIFO is among the choices for raising more federal dollars. LIFO is not a tax loophole or a subsidy. Rather, it is a tried and true accounting method.
With any tax reform package that includes LIFO repeal, Louisianans lose. Many Louisiana companies operate on a narrow margin. They fought through a tough economy to return our state to growth. They may face going into debt to pay new federal taxes, or worse, shut their doors, taking jobs with them.
Furthermore, the opportunity costs would be significant, as a result of delays or scrapping of planned expansions or new hires.
There will be an attempt to resolve Louisiana’s inventory tax problem with a new governor and a new Legislature next year. If Louisiana eliminates its rightfully derided local inventory tax, it will be necessary to establish new and better ways to replace that funding for local parishes. That is no simple task. However, we will somehow come together to accomplish it. Meanwhile, Congress should not add to the burden of the state tax increases recently enacted by the Legislature.
Eliminating LIFO will do little, if anything, to balance the federal budget. Yet, it will hurt businesses, big and small, along with their employees and our economy. LABI hopes Louisiana’s congressional delegation will recognize the vital role companies with inventories play in our economy and reject any proposal to repeal LIFO.