What do you do with a sales tax system that was ranked worst in the country going into the special legislative session earlier this year and emerged even worse?
That’s the question a 13-member blue ribbon panel grappled with on Friday, with an eye toward making recommendations to the Legislature on how to overhaul Louisiana’s tax code next year.
For several hours, the Task Force on Structural Changes in Budget and Tax Policy heard tax experts bemoan Louisiana’s sales tax system, which not only has the highest average rate in the country — about 10 percent — but is so complicated that tax experts have trouble understanding it.
“Our system is so complex right now that compliance is horrible,” Russell Stutes Jr., a Lake Charles-based private attorney who represents local governments in lawsuits with private companies, told the panel.
The solution, said task force Co-chairman Jim Richardson, an LSU economist, is a sales tax system that ends tax breaks, which would allow for a lower rate.
Stutes said he believes that the people who shop at Wal-Mart would prefer to end the dozens of tax breaks in exchange for paying less than 10 or 11 percent in sales taxes.
The task force members didn’t need much convincing that Louisiana’s sales tax system has gone terribly wrong.
“It fails the fundamental test of simplicity and fairness,” said Sean Reilly, a former state House member from Baton Rouge who is the chief executive officer of Lamar Advertising. “What we’re doing today really, truly does not make sense.”
The state sales tax is the biggest generator for state tax collections, meaning that the stakes are high for policymakers in whatever changes they make.
The root of the problem, everyone seems to agree, is that the sales tax system contains a hodgepodge of exemptions and exclusions — 192 in all. As a result, the state collects as much in sales taxes (about $3 billion) as legislators over the years have decided that the state shouldn’t collect.
Among the 192 are exemptions from sales tax on tickets to the New Orleans Jazz and Heritage Festival; on the purchases of manufacturing components, machinery and equipment; and on purchases of coin bullion with a value of $1,000 or more.
“We probably have more credits, exclusions and exemptions than other states combined,” Jay Dardenne, the state’s chief budget official as commissioner of the Division of Administration and a panel member, said after the meeting ended.
But exactly which taxes should now be subject to purchases is a complicated subject.
William Backstrom, a New Orleans tax attorney with the Jones Walker law firm, told the panel that he doesn’t believe “business inputs” should be subject to sales taxes. Excluding items that businesses purchase would keep a slew of sales taxes off the books.
Even before the special session began, The Tax Foundation ranked Louisiana as having the country’s worst sales tax system. It got worse by all accounts during the final frenzied hours of the special session in March. Legislators, moving to eliminate a short-term budget deficit, raised the state sales tax by an additional penny but exempted a bewildering list of purchases for different amounts during different periods of time.
Gov. John Bel Edwards’ call Friday for the second special session in June includes a request that lawmakers clean up sales tax errors from the first special session.
“We need to correct the imposition of sales taxes on a number of items,” Dardenne said. “Some of the changes were because of the rushed nature.”
Robert Travis Scott, president of the Public Affairs Research Council of Louisiana, a Baton Rouge-based think tank, and a member of the panel, said he believes the time is ripe for reforming the tax system.
“Everybody on all sides recognizes that our sales tax system is flawed on every level,” Scott said. “We have an opportunity like never before to try to fix this. That’s because we have a governor who wants to see it fixed. We have a Department of Revenue that is already recognizing the problems and wants to get it fixed. You have the tax committees in both the House and Senate that have an appetite for reform. It is a propitious time to restructure and make better the tax system for the government, taxpayers and consumers in 2017.”
The task force is supposed to issue its recommendations to the Legislature by Sept. 1.
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