Louisiana ballot measures would change tax structure, collections

By Chip Barnett

Source: The Bond Buyer

October 27, 2021

Voters in Louisiana will go to the polls on Nov. 13 to decide on constitutional amendments that would change the way taxes are structured and collected in the state and how the state budget is managed.

There are four amendments on the ballot. The first, Amendment 1, sets up a new framework for the collection and distribution of state and local sales taxes.

Amendment 2 is a more complicated swap plan, touted as revenue neutral, which would lower the maximum allowable rate of individual income tax and to allow the Legislature to provide a deduction for federal income taxes paid.

Narrower in scope than the others, Amendment 3 would let a few local levee districts create a five-mill property tax without voter approval.

And Amendment 4 would increase the amount the governor and Legislature could cut protected funds to when the state is facing a mid-year budget shortfall, from 5% to 10%. 

Passage of the Amendment 1 would create a new structure to collect state and local sales taxes.

It would authorize the Legislature to create the State and Local Streamlined Sales and Use Tax Commission, which would provide for the streamlined electronic collection of sales and use taxes and take this function away from local governments.

John Hallacy, founder of John Hallacy Consulting LLC, said that streamlining the process was the aim of this measure.

“Centralization of the tax collection process in the state is much more efficient than the process as it stands today,” Hallacy told The Bond Buyer. “There have to be efficiencies in making the change. Collection costs should decline.”

The Bureau of Governmental Research held a webinar on Tuesday that took a deep dive into the amendments.

BGR is an independent nonprofit research organization that focuses on public policymaking and the improvement of government in the New Orleans area.

“The sales tax in Louisiana is indeed the major revenue source of revenue for local governments and a major revenue source for the state government,” James Richardson, professor emeritus at Louisiana State University’s Department of Public Administration, said during the webinar.

“It’s been that way for the last 100 years, but what we’ve done is we’ve always said the locals will collect their sales taxes and the state will collect its sales tax.”

He said that until 1990, when there was a consolidation of some authorities, there had been multiple local units collecting taxes. Today, there are still about 55 separate units collecting local taxes.

He said that under Amendment 1 the new commission would become the single sales tax collector in the state and would consist of eight members: four state representatives and four local representatives.

Richardson noted that there are four major sales taxes collection sources — the state, locals, motor vehicle fuel taxes and remote sellers.

Richardson said some people may be hesitant to support the proposal because the commission has not been created by the Legislature and exactly how it will work, or what its responsibilities will be, have not yet been defined.

Looking at Amendment 2 on income taxes, Louisiana Secretary of Revenue Kimberly Lewis said there are three income tax pieces: the individual income tax, the corporate income tax and the fiduciary taxes.

“The most important thing to remember is that while we are repealing the federal income tax deduction in the constitution, this does not change the statutory provision,” she said, noting that some have pointed out that this a shortcoming in the amendment in that it leaves it up to the Legislature as to whether to eliminate it.

The amendment would swap out the federal income tax deduction for a cut in personal and corporate income tax rates and cut in the corporate franchise tax. The top personal income tax rate would drop to 4.25% from 6%. Under the plan, if the state collects more tax revenue than expected additional across-the-board income tax cuts would be triggered.

For businesses, there could mean a big impact on economic development in the state over time.

“Passing constitutional Amendment 2 would be one small step for changing our tax rates, as it would take our personal income tax rate from 6% down to 4.25%, but one giant leap for tax reform,” said Michael Hecht, president and CEO of Greater New Orleans Inc.

He said it was a recognition that state has a problem, in that currently the tax system gives residents and businesses the worst of both worlds. He said that the state gives the impression to outside investors that it’s a high-tax state because when looking at the top tax rate, Louisiana comes in as the 19th highest in the country, He said that in reality the state is one of the cheapest because it collects the ninth least amount in taxes in the U.S.   

“If you like lower taxes, more jobs and greater fiscal stability, then people should support constitutional Amendment 2,” he said, adding that 93% of residents would pay less in overall taxes, according to the Legislative Fiscal Office.

However, some critics say across-the-board income tax cuts would cut the amount of money available for the state to pay for roads, schools, hospitals and other uses.

Since 2011, Louisiana has sold about $9.5 billion of bonds, with the most issuance occurring in 2012 when it offered $1.8 billion.

Louisiana’s general obligations are rated Aa3 by Moody’s Investors Service and AA-minus by both S&P Global Ratings and Fitch Ratings.

“The measures here in Louisiana that we are looking at are interesting,” Eric Kim, a senior director and head of the U.S. States Group at Fitch Ratings, told The Bond Buyer. “But the main challenges for Louisiana don’t relate to these ballot measures at all — it’s about their long-term structural issues.”

He said that some of the amendments could have implications over the long term, but that they would take a while to play out.

“But the actions the Legislature took in the past session — outside of approving the ballot measures — are things that we think are more meaningful.”

For fiscal 2022, the state adopted a $9.6 billion general fund budget, an increase of 3%, or $253 million, from fiscal 2021.

Lawmakers also approved a bill that will gradually shift 60% of motor vehicle sales tax collections from the general fund to the Transportation Trust Fund with the Legislative Fiscal Office estimating a $148 million shift beginning in fiscal 2024 and a $296 million shift in the following fiscal year.

Fitch said that while these changes address longstanding transportation capital needs, they exacerbate a potential general fund structural budget challenge.

“One of the issues for Louisiana in the past has been structural balance over the long-term and the current administration has done a fair bit to really focus on that during their time in office and have made some progress, but there are some basic challenges,” Kim said. “They’ve got, for example, a temporary sales tax that is going to expire in 2025 that they’re relying on right now to help manage their budget and that’s not a long-term source. It is scheduled to sunset.”

In fiscal 2025, the expiration of the temporary 0.45% sales tax levy will create what may be a $500 million gap, about 5% of the state’s fiscal 2022 budget. The transportation shift adds another $300 million to that expected gap.

While this is not insurmountable, Fitch said it is an obstacle toward the state achieving long-term structural balance.

“[Amendment 2] is being framed as revenue neutral,” Kim said, “But the risk there is that what’s envisioned as revenue neutral now doesn’t necessarily mean that it will always play out that way. It’s sometimes difficult to project exactly what revenue will look like over the long term.”

Looking at the last amendment on budget management, Hallacy said that while flexibility was good overall it came with some risks.

“Having the ability to pare protected areas of the budget by 10% makes sense on its face,” he said. “There are still areas that need the protection from draconian cuts including healthcare segments. The rating agencies would be more favorable of such a move because it represents a greater degree of financial flexibility.”

Kim agreed.

“Giving governments the ability to manage their budgets more widely, is generally a positive characteristic in our view,” he said.

“One of the things about state governments generally and make their credit quality so high, for the most part AA-plus and AAA credits, is that states essentially act as sovereigns in terms of managing their budgets,” Kim said. “They can pretty much do what the Legislature and governor agree to do in terms of managing their spending and managing their revenue growth. So this amendment would seem to broaden that authority, so this kind of measure is generally helpful.”

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