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Good News/Bad News for Louisiana Taxpayers

December 13, 2018

By: Stephen Waguespack

When it comes to tax increases, the last three years in Louisiana have produced one batch of bad news after another. 

Nine legislative sessions in three years. Several billion more tax dollars paid. All in the name of funding a state government budget that has grown more than $5 billion since 2015. While everyone wants to do their part to help government function appropriately, the overwhelming focus lately on more taxes rather than government reforms to accomplish this goal has been frustrating for everyone. 

Let’s face it: we all are due for some good news on the tax front.

Last week, some of that much needed good news was finally delivered when the Louisiana Supreme Court ruled in Smith v. Robinson that a 2015 tax imposed by the state is unconstitutional. According to the legislative fiscal analysis, the total amount of unconstitutionally collected tax should be roughly $70 million (though the Department of Revenue has yet to release an official amount.)

Think about it… after all of the taxes raised over the last few years, $70 million can now be returned to Louisiana taxpayers. What a boost that will be to job creators trying to compete in a tough economy, especially those small businesses facing tight margins, rising insurance costs and one new tax after another.

Even beyond the value it will provide to the economy, the merit for returning that unconstitutionally collected money should be crystal clear.

The Court was adamant this tax was a blatant violation of the Commerce Clause of the U.S. Constitution, a ruling which should have come as no surprise to many in the State Capitol. Act 109 was opposed by many organizations, including the Louisiana Association of Business and Industry (LABI), during the 2015 session because experts believed it unfairly taxes Louisiana income multiple times. In fact, Senator Barrow Peacock (R-Bossier City) clearly shared the legal problems with the bill during debate on the Senate floor at the time (click HERE to watch). 

Act 109 limited the tax credit for taxes paid to other states, disallowing credits for taxes imposed on net income paid to states that do not have a reciprocal credit. In effect, some Louisiana residents who own interests in certain LLCs or S corporations doing business here and in Texas became subject to multiple taxation on the same income.

Although Texas does not have an income tax, it does levy an entity-level franchise tax based on the gross receipts of businesses operating in Texas. Because income earned and taxed in Texas flows through to a Louisiana resident individual income tax return, disallowance of the credit resulted in Louisiana taxing that same income a second time. 

In plain English, the state messed up and collected taxes that it shouldn’t have. And these aren’t from big multi-national corporations. These are Louisiana home-grown companies that are located here but also have some business in Texas and other states. These are the Louisiana service companies all throughout Acadiana and the Bayou who have been working in Texas to make ends meet. These are the Louisiana contractors building facilities across the south. These are Louisiana small businesses following customer demand, trying to expand their market share and keep their workers employed. These companies have been forced since 2015 to pay taxes twice on the same income, and the Court finally put an end to this unconstitutional tactic.

Where is the bad news to this you may ask? Well, thus far the state says it has no plans to give most of that money back to the taxpayers.

In fact, Governor Edwards’ Administration said this week they only plan to reimburse about $23,000 of the unconstitutionally collected tax. That is less than one percent of the total estimated amount collected. This is simply not fair.

Their argument is only those few taxpayers who filed their tax “under protest” would be eligible for a refund. If this position continues, it means a taxpayer would have had to have been Nostradamus the last few years and file these specific taxes under protest in order to be protected from an unconstitutional tax.

Do we really want policymakers in the State Capitol to think that they can just pass a tax that may be unconstitutional at any time they need revenue… keep it quiet and collect as much as they can as long as they can until the Court steps in to stop it… and then keep most of the money they’ve collected?

If this type of burden on the taxpayer is allowed to stand, Louisiana businesses would be wise to simply file every tax under protest from this point forward in order to reserve their right to be protected from actions that may eventually be found unconstitutional. Does the state really want to promote that type of behavior?

The Administration and Legislature need to right this wrong. They should do everything they can to reimburse people who were double taxed. Mistakes happen, but when found, they must be rectified rather than swept under the rug.

But just in case they don’t, taxpayers need to take steps now to protect themselves.

LABI urges Louisiana businesses operating in multiple states to immediately contact a tax professional for advice on next steps. The state Constitution says the Legislature “shall provide a complete and adequate remedy for the prompt recovery of an illegal tax paid by a taxpayer.” There are existing procedural remedies available in order for taxpayers to protect their interests in such situations. If these remedies don’t do the job, then the Administration and Legislature always have the authority to provide a new solution when needed. They should make it a priority to find a solution in this case.

This ruling by the Louisiana Supreme Court is some long-sought good news for Louisiana taxpayers, but it won’t mean much if the Administration and Legislature think they can just keep the cash if they ever get caught doing something like this again.