What do you do when Republicans don’t like income taxes and Democrats don’t like sales taxes? Gov. John Bel Edwards came up with a gross receipts tax that he is now calling a commercial activities tax. It would replace the state’s corporate income and franchise taxes.
You can understand why the governor is trying to find something on which reluctant state legislators might agree, but what in the world is a commercial activities tax (CAT)? It’s described as a corporate tax on sales, but that doesn’t help lawmakers or anyone else understand exactly what it’s all about.
Whenever situations like this arise, you can always count on the Public Affairs Research Council to help clear the air. The non-partisan, non-profit organization has been explaining these complex things since 1950.
“The Governor’s Surprise” is a PAR research brief that explains and evaluates the gross receipts tax or CAT. The agency uses the same process it has used for years to explain and interpret proposed state constitutional amendments. The brief can be found at www.par.louisiana.org.
The thing that has puzzled legislators and citizens alike is the fact the CAT wasn’t a brainchild of a task force that after many months came up with recommendations for reforming the state’s budget and tax systems.
Edwards is obviously trying to get some kind of agreement on his CAT. Unfortunately, his tax idea has caught even legislative leaders by surprise.
“I know very little about it,” Senate President John Alario, R-Westwego and a close ally of the governor, told The Times-Picayune.
Sen. J.P. Morrell, R-New Orleans and chairman of the committee that decides the fate of tax bills, said, “Even the people talking about it contradict each other and don’t understand it. They haven’t had enough time to digest it yet.”
Outspoken opponents of the CAT include Americans for Tax Reform (no surprises there), the Pelican Institute, the Louisiana Association of Business and Industry, the National Federation of Independent Businesses, the Louisiana Chemical Association, the Louisiana Mid-Continent Oil and Gas Association and the Tax Foundation.
The Pelican Institute offered perhaps the most critical analysis.
“If passed, a gross receipts tax would be a quadruple whammy for families and businesses across Louisiana by pushing capital out of the state, reducing production, raising costs and lowering real wages. From Shreveport to Slidell — the service industry to seafood — this tax is bad for all Louisianians.”
In explaining three business taxes, PAR said, “Put simply, a corporate income tax is basically a tax on company profits, a franchise tax is a tax on company wealth or capital and the CAT is a tax on company sales revenue.”
Although the Edwards proposal has both conservative and liberal critics, some economists like the fairness, stability and simplicity in the way the gross receipts tax collects revenue. The governor likes the Ohio version of the tax, but versions of it also exist in Delaware, Nevada, Texas and Washington.
One attraction is the low tax rate. In Ohio, it’s 0.26 percent, which is below 1 percent. Louisiana’s highest corporate income tax rate is 8 percent. PAR said the optimal gross receipts tax would aim to inflict the lightest pain possible on the greatest number of entities possible.
PAR said the favorable points are it covers all types of businesses, is easier to administer, is more predictable and stable, eliminates the unfavorable franchise tax and Ohio’s experience could serve as a guide.
On the other side of the coin, the tax is considered a hidden form of a sales tax that is passed on to the consumer, it hurts new companies struggling to survive and others with low profits and could be an additional tax that some businesses aren’t paying now.
It’s difficult to determine exactly how much the proposed tax would raise because of Louisiana’s many tax rebates, exemptions, credits and other breaks that total $6.8 billion annually. Some of those could be discontinued, but that is a decision that would be made by the Legislature.
PAR said any discussion of the new tax should consider whether it would provide a significantly better tax system than the one we have now. Tax Foundation said the current tax system is definitely broken.
One of the biggest challenges facing the Legislature is finding revenues to replace a 1 percent state sales tax increase that goes off the books on June 30, 2018. It brings in $880 million annually, and the governor estimates the CAT would generate $900 million.
If the CAT doesn’t fly, the only other major source of replacement revenue would have to come primarily from curtailing or ending many of the $6.8 billion in tax breaks given annually. Legislators know how extremely difficult that can be, and many of those are protected in the state constitution.
Conservative Republican state legislators and their political contributors insist the only way to close budget deficits is to reduce spending. But when push comes to shove, they seldom come up with concrete ideas about where spending can be cut.
State legislators who voted to raise the state sales tax in 2016 should understand that something has to be found to replace the revenues that increase produces. Edwards wants to do much of what the task force recommended to reform the budget and tax systems, but there is some question at this point whether lawmakers will even agree to those changes.
We have the makings for what could become a Washington, D.C., style political stalemate.