Tax Analysts Blog

Louisiana Tax Reform: Some Smart Guys Worth Listening To

Posted on Mar 25, 2015

Recently, the Louisiana Tax Study Group released its report recommending changes to almost all the state's taxes. The study, commissioned by the Legislature, was performed by three academics, Jim Richardson of Louisiana State University and Steven Sheffrin and James Alm of Tulane University. Those in the state public finance business know that all three are preeminent scholars -- so folks will and should take their recommendations seriously.

The study's most significant recommendations would affect the corporate income tax. It is no secret that I think the corporate income tax should be repealed in every state. I've been saying that since 2002. The tax raises little money (about 3 percent of total state tax revenue). It is riddled with what tax civilians would call loopholes. But those loopholes are just legal planning opportunities that allow the smart and crafty to minimize their burdens to zero. No one can articulate a reason for taxing corporate income at the state level. And let's face it -- taxing capital in a global economy is pretty dumb.

The study's authors propose changes that would likely lead to more corporate income tax revenue. They suggest adopting combined reporting. Louisiana is a separate entity state, which essentially means that planning opportunities are legion. Adopting combined reporting will prevent some -- but not all -- planning gimmicks that make a mockery out of the tax laws. If you're going to tax corporate income, you have to use combined reporting. Interestingly, the authors recommend the use of addback rules while waiting for combined reporting. That might signal how difficult they believe it will be to adopt combined reporting.

The study then follows a national trend and recommends single-sales-factor apportionment. The state now requires single-sales-factor apportionment for manufacturing and retail. The study recommends expanding this rule to all business. I understand the politics of single-sales-factor apportionment. In-state businesses aren't penalized for investing in plant and equipment. And out-of-state businesses that sell into Louisiana pay. The problem with the single sales factor is that it completely divorces corporate taxes from any notion of benefits received. The corporations that pay don't receive much from the state.

Similarly, the study recommends market-based sourcing for services. Traditionally, services were sourced to the states where they were performed. The trend has been to source services where they are used. This is again a way to tax out-of-state companies selling into Louisiana.

The study's best proposal by far is to repeal the state's franchise tax. State franchise taxes are nonsensical in a modern, global economy. Actually, they have always been nonsensical. The tax applies only to C corporations, and it's just another reason why businesses choose to form passthrough entities. The tax is imposed without respect to profitability. Thus, start-ups and businesses caught in an economic downturn pay. Business capital can be moved easily -- and the tax is about as complicated as human beings can make it (the rules in 18 states that still impose franchise taxes vary widely). There is a proposal in Mississippi to repeal that state's tax. Louisiana should follow suit.

The study also recommends excellent sales tax changes. It calls for a moratorium on exemptions, an end to the asinine sales tax holidays, and a sunset of all exemptions in five years coupled with a requirement that they all be reauthorized by the Legislature and the governor. As importantly, the study calls for an expansion of the sales tax base to include personal services. It would be better if the study called for a rate reduction, but expanding the base is the key to a strong sales tax.

The study makes many other recommendations, including a moratorium on new personal income tax exemptions. Overall, the proposals are excellent. The Louisiana Legislature would be wise to heed the authors' advice. What they are proposing would make the state revenue system stronger and fairer. That is a good thing.

Read Comments (2)

emsig beobachterMar 24, 2015

What would you expect from three eminent economists -- application of Occam's
Razor -- the simpler the better. Another state tax study that will gather dust
on the book shelves of Louisiana state law makers and public executives.

It's not that the policymakers don't know what good tax policy should be. They
do know but they don't want to implement it. Too much "blood in the water."

robert goulderMar 26, 2015

You are correct about franchise taxes; states would do well to repeal them.

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