The tax man cometh

If you haven’t been following Governor Jindal’s proposed tax-swap, you really should. Honestly, anyone living in or transiting through Louisiana should be paying attention to this deal considering the massive change it would bring to our tax structure. While my posts normally address East Baton Rouge Parish (EBRP) politics and government rather than Louisiana politics, the issue of state taxes actually dovetails nicely with local government, particularly on the sales tax side of the house.

For those of you that are out of the loop, the Governor is proposing a full overhaul of Louisiana’s tax structure. Basically: income tax = eliminated, sales tax = increased, and property tax = left alone.

In addition to that, the Governor is proposing eliminating many tax loopholes and incentives that currently exist on the books while eliminating the corporate franchise tax (which tend to offset each other to a degree). The reported intent is to make Louisiana’s tax structure easier for individuals and businesses to navigate and more equitable. There’s quite a bit of dissension about whether it actually achieves that goal.

To understand how this change could impact EBRP, you need to examine our current tax structure. Very broadly speaking, taxes are assessed in three areas: sales, income, and property.

Sales Tax: With very few exceptions, everyone pays sales taxes. As it has such a large tax base, both Louisiana and EBRP collect sales taxes, 4% for the former and 5% for the latter. The tax line on the receipt for a typical consumer good is a consolidation of the two taxes. The Louisiana Constitution (Article 6, Section 29(A)) limits the tax rate to 3% for local governments such as EBRP. This limitation can be overridden, in the obvious case of EBRP.

Income Tax: Most people pay income taxes through their paycheck. Come Spring tax time, we file taxes and then either pay more or get money back depending on whether the amount that was taken out of our paycheck was more than or less than our overall tax burden. The Louisiana Constitution (Article 7, Section 4(C)) prohibits local governments like EBRP from assessing income taxes, so this is strictly a function of state government (and the Feds, of course).

Property Tax: Most people pay property tax, either through direct property tax or through rent. This bill generally comes due around the beginning of the year and is collected through the EBRP Sheriff’s Office. You can even go to the nice, new EBRSO Sheriff’s Office website and check to see what government services your property taxes are funding. One thing you’re not going to see on there is a state property tax. Property taxes are the purview of Parish and local governments. With that said, there is nothing preventing the state from collecting a property tax. In fact, the Louisiana Constitution (Article 7, Section 19) explicitly allows the state to tax property at a rate to not exceed 5 ľ mills.

Basically, we have the State of Louisiana as full beneficiary of the income tax, EBRP as full beneficiary of the property tax, and both of them sharing the sales tax. If Louisiana gives up income tax revenue and relies almost exclusively on sales tax, it will place a great deal of pressure on that particular revenue stream, particularly considering the proposed scale of the change. Governor Jindal recently updated his proposed tax increase. Instead of increasing the current 4% to 5.88%, the reform will bump it up to 6.25%. That’s a 56.25% increase over our current state sales tax rate. The total EBRP sales tax would be 11.25%.

Given the increased demands between the state and local government on this revenue stream, it will grow increasingly difficult to enact new or increase old sales taxes for local use, particularly since local governments are generally capped at 3% by the Constitution without extraordinary measures. As such, local governments will increasingly rely on property taxes. Given the recent and varied bond failures as well as the highly polarized vote on the CATS property tax, I wouldn’t expect smooth sailing when it comes to local tax revenues if this particular tax reform comes to pass.