Dozens of categories of business transactions are not subject to the state sales tax in Louisiana, thanks to a special kind of tax break granted with increasing frequency in recent years by lawmakers, but officials at the Department of Revenue don’t know how much they cost the state treasury.
The tax breaks — known as “tax exclusions” — are beginning to come under scrutiny. They cost the state anywhere from $320 million to $920 million per year, according to the best estimate based on legislative figures.
“Tax exclusions set up a preferred class of tax break,” said Rep. Julie Stokes, R-Kenner, who has been pressing to reform the sales tax system. “You don’t want to have that just because somebody has a better lobbyist.”
Transactions covered by tax exclusions are considered to be out of the taxable base, which means legislators have deemed them not subject to sales tax.
Examples of transactions that are excluded from sales tax include the dollar value of rebates that manufacturers give to new car buyers, New Orleans Jazz and Heritage Festival tickets and school buses bought by independent operators for public schools.
A 13-member panel known as the Task Force on Structural Changes in Budget & Tax Policy has begun studying how to reform the state’s loophole-filled tax system and will examine tax exclusions at its next meeting on Friday.
The Senate Revenue and Fiscal Affairs Committee is undertaking its own review of tax breaks. Business lobbyists typically fill the meeting room on Monday afternoons when the committee meets. When their tax break is up for scrutiny, the lobbyists always give a stirring defense of why lawmakers should not touch it.
The cost of tax exclusions is growing because they have become a favored tactic for business lobbyists seeking to get their clients’ sales tax bills reduced.
“It’s a safer place to be,” Revenue Secretary Kimberly Robinson said in an interview.
To understand why requires a brief lesson in the unexciting world of tax law.
When talking about tax breaks, most tax specialists refer to them as tax exemptions. Indeed, the Revenue Department publishes an annual guide called the Tax Exemption Budget that details how much the state forgoes every year because of the tax breaks created by lawmakers over the years.
The current 403-page document shows that 192 “tax exemptions” cost the state nearly $3 billion in sales taxes last year, when the treasury collected $2.6 billion in sales taxes.
But there is a distinction between tax exclusions — which are simply not subject to tax — and tax exemptions, for which the Legislature has passed a law decreeing that a tax should not be collected.
In the end, taxpayers don’t pay sales taxes on either, but the distinction is important, as policymakers are only beginning to grasp.
“It’s kind of new to me,” said Jay Dardenne, the state’s commissioner of administration, a former lieutenant governor and state senator who chaired the Senate Finance Committee from 2000 to 2004. “A lot of people may not be cognizant of this. It’s something we should look at and gather information about.”
Dardenne is one of the 13 members of the task force studying the tax code.
In reality, 83 of the 192 exemptions actually qualify as tax exemptions; another 83 are tax exclusions, and the rest belong to assorted categories.
Clever business lobbyists and tax attorneys have come to understand that judges favor tax exclusions compared with tax exemptions that are challenged in court. That’s because the burden of proof when challenging the legality of a tax exclusion falls upon the state or local government, while for tax exemptions, the burden falls upon the taxpayer, Robinson said.
At the same time, legislators have traditionally been more reluctant to suspend tax exclusions than tax exemptions.
The Legislature regularly suspended sales tax exemptions — thereby making those transactions subject to the sales tax — beginning with Gov. Buddy Roemer in the late 1980s through Gov. Kathleen Blanco about 10 years ago.
A study by LSU economics professor Jim Richardson shows that the creation of tax exclusions has accelerated in recent years.
Excluding Jazz Fest tickets from sales taxes, for example, was done under a 2011 law sponsored by Rep. Cameron Henry, R-Metairie. An analysis at the time of its passage said it would cost the state and New Orleans $2.25 million per year, at a time when the average Jazz Fest ticket cost $52.50. They now cost at least $65.
Henry said he pushed the measure because Festival Productions, Jazz Fest’s owner, is a nonprofit.
The analysis shows that Henry sponsored the bill because state tax authorities had begun applying sales taxes in 2009 when Festival Productions hired a private company to manage the event.
Under another tax exclusion, customers don’t have to pay sales taxes when manufacturers offer them a rebate to buy a new car. Under it, a customer who gets a $2,000 rebate on a $30,000 new car, for example, pays sales taxes on only $28,000 of the purchase.
“The better the deal the customer gets, the more likely he is to buy the car,” said Bob Israel, the longtime lobbyist for the car dealers. He said he wanted an exclusion “because the next time someone changes the tax exemptions, it wouldn’t be affected.” This tax exclusion, which was created in 1991, is expected to cost the state $16.5 million in 2016.
In most cases, however, state officials don’t know the cost of tax exclusions “because they are not included in the returns,” Robinson said.
Ironically, legislators partially took away numerous tax exclusions when they passed House Bill 61 during the special session earlier this year, to raise money to help fill the budget deficit.
Jazz Fest tickets and car rebates are subject to a four-cent state sales tax from April 1 to June 30 and then a two-cent sales tax for the next two years.
“The only exclusions we went after used to be exemptions,” said state Rep. Jay Morris, R-Monroe, the sponsor of House Bill 61.
Follow Tyler Bridges on Twitter, @TegBridges.
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