A week ago, Louisiana legislators were poised to approve a penny sales tax increase, which would be the most significant tax increase state government has passed in decades. It’s a move that would secure firmly Louisiana’s No. 1 spot for highest combined rate of state and local sales taxes on goods and services.
This week, short on answers and desperate for solutions, lawmakers who have until Wednesday to close the $900 million midyear budget shortfall, are giving serious consideration to adding another half or full penny on top of that.
Traditional opponents to a sales tax increase have mostly held their tongue for the majority of the three-week legislative session, which has centered around the single penny increase, noting that the alternative to not raising the revenue would have devastating consequences across the state. Still, critics are quick to point out that a sales tax increase of any size disproportionately hurts the poor, and local governments say the hike could thwart their own abilities to raise taxes for local projects in the future.
Municipalities and districts charge varying sales taxes to support local government services, but on average, the local sales tax rate is about 5 percent. The state sales tax is 4 cents, so the single penny increase alone — which legislators seem mostly in agreement to pass — would mean that moving forward, the average Louisiana consumer will spend at least about a dime in taxes for every dollar they spend on routine purchases like new socks or a hamburger at a restaurant. (Groceries and prescription drugs are sales-tax exempt.)
But there are plenty of towns and shopping centers across the state that already have high sales taxes.
Consumers buying clothes at the Juban’s Crossing development in Livingston Parish already pay 10.5 percent in sales tax. A plate lunch in the small town of Bernice, in north Louisiana’s Union Parish, is already taxed 11 percent. A cup of coffee in some parts of Donaldsonville, in Ascension Parish, has 10 cents in taxes attached. Now, imagine a one to two pennies per dollar added to that, if the sales taxes increase as proposed.
Ronnie Harris, executive director of the Louisiana Municipal Association, which represents local governments, said public perception is sour on sales taxes that exceed 10 percent.
“I call it the double-digit ceiling. When you hit 10 percent, in the minds of people, they say, ‘OK, that’s enough,” Harris said. “It diminishes the political ability of asking the public to pay anymore.”
Harris said any size increase will be tough in local governments, which have to levy their own local taxes for services like fire departments and libraries and to fund new construction. But ultimately, the LMA said that local governments would be even more severely impacted if the state is unable to close the midyear budget deficit.
He noted that local governments can be impacted by the state budget deficit in other ways when the Legislature tries to undedicate revenues that have typically flowed to parish and municipal governments.
East Baton Rouge Parish officials say they’re hopeful that the state will find another alternative to the sales tax. In Baton Rouge, the combined sales tax, with the minimum proposed increase of one penny, would be 10 cents per dollar. But in Baker and Central, the sales tax would be 10.5 percent.
William Daniel, chief administrative officer to Mayor-President Kip Holden, said the high overall sales tax rate could deter spending, which would hurt the parish’s collections. East Baton Rouge Parish collects 3 cents of sales tax to fund their general operations, construction for roads and sewer projects. The school system collects the other 2 percent.
In recent years, Holden’s office has pitched four unsuccessful tax proposals to fund capitol improvement projects like a new parish prison, and all of the tax plans relied on a combination of sales tax and property tax increases.
Baton Rouge Councilman Joel Boe sent repeated emails to Baton Rouge-area legislators urging them to reject the sales tax increase for that reason.
“This will kill any chance we have to passing another millage or sales tax increase for tangible items that we desperately need such as roads, bridges, new prison, mental health facility, and etc.” he wrote, calling the tax increase “absurd” and “offensive.”
In the coming years, Daniel said, it’s possible Baton Rouge leaders could ask for a tax increase again to support a new prison or a renewal of the half-cent local sales tax that supports the popular parish road improvements plan, dubbed the Green Light Plan.
In New Orleans — where the more modest one-penny plan would increase general sales tax to 10 percent — Mayor Mitch Landrieu offered cautious support of the sales tax increase for 1 cent.
“The Mayor supports the Governor’s plan to temporarily raise the state sales tax because New Orleans’ progress could be halted by the dire cuts that have been proposed as the alternative, particularly to public safety, healthcare and education,” said Hayne Rainey, press secretary for Landrieu. “It would also be penny-wise and pound-foolish because it would reduce what New Orleans’ economy can generate for the rest of the state.”
At the same time, he said it’s important that “local governments be empowered to control their own destinies to raise local revenue so that we may continue to provide our residents the critical services they need.”
Voters who live in the area also recently passed a quarter-penny increase for sales tax in the French Quarter. And this April, city voters will be deciding on whether to increase property taxes by $26.6 million a year for expanded police service and to pay off a legal settlement with firefighters.
The single penny increase, which would raise $210 million in revenue before the fiscal year ending June 30, has already been OK’d by both the House of Representatives and the Senate, with some disagreement about when it would sunset, which has yet to be worked out. But late last week, business lobbyists, hoping to divert attention away from proposals to curb tax exemptions benefitting businesses, started pitching the idea of increasing the tax by another half-cent to 1 cent.
Gov. John Bel Edwards said Sunday night he did not favor adding a second penny to the sales tax increase. Rather, he said, he’d like to see the tax burden spread more evenly and include some business reforms.
Sales tax increases and taxes on other consumables like cigarettes and alcohol are being proposed for the fiscal year, in part, because they generate dollars to the state immediately, unlike changes to income or corporate taxes, which wouldn’t generate new money until the next fiscal year.
Republican leadership in both chambers are warming to the idea and say a deal could be finalized on Monday. But the late-in-the-game plan to expand the penny has attracted more opposition.
Beyond the local governments, every household and consumer in the state will be affected by the increase.
For a worker who earns between $19,000 and $37,000 a year, he or she will pay an average of $210 more dollars in sales tax dollars for a 1 percent sales tax increase, according to the Institute on Taxation and Economic Policy. For someone who earns between $103,000 and $209,000 a year, the average tax change will be $567.
“Sales taxes are generally thought of as a regressive tax because even though everyone pays the same rate, people with lower income pay a higher percentage of their income than people larger incomes,” said Jan Moller, director of the Louisiana Budget Project, a nonprofit that advocates for low- to moderate-income families.
Moller said he’s bottled his opposition to the single penny increase because he recognizes the state doesn’t have better options to raise significant revenue in a short period. But his group has vocalized opposition to extending the sales tax hike beyond the single penny, especially since the Legislature does not appear to be seriously considering any meaningful tax reform that would force businesses and corporations to pay more in tax burden.
While Louisiana has one of the highest sales tax rates, it is considered a low tax-burden state. The Tax Foundation found that in 2012, Louisiana was ranked 10th-lowest for collections from state and local corporate income taxes and eighth-lowest for average property tax collections.
“Picking this option means choosing to side with large, multinational companies over the working families of Louisiana,” Moller said in a statement about the proposed second penny.
Follow Rebekah Allen on Twitter @rebekahallen.