What happens when you rank last in something and you make it even worse?
Welcome to Louisiana’s sales tax system.
It ranked 50th among the 50 states, according to the Tax Foundation, a pro-business Washington, D.C.-based think tank whose tax and budget rankings are frequently cited by state legislators.
Louisiana ranked last before the state Legislature passed two measures during the just-completed special session that, everybody agrees, made the sales tax system even worse.
“They would rank us 70th if they could, maybe 80th,” said Rep. Julie Stokes, R-Kenner, probably the Legislature’s most knowledgeable member on tax issues.
Before the special session began, Louisiana had a 4-cent state sales tax, which, when combined with about 5 cents of local sales taxes, gave Louisiana the country’s third-highest overall average sales tax rate at 9 percent. At the same time, 196 separate transactions were exempt from being charged the 4-cent state sales tax.
Needing to raise money quickly to close a record budget gap, legislators and Gov. John Bel Edwards turned to sales taxes during the 25-day special session that ended March 9.
Beginning April 1, Act 26 raised the state sales tax by a penny — giving Louisiana the highest combined local and state sales tax rate in the country — and provided a bewildering list of exemptions to paying that extra penny.
Beginning April 1, Act 25 eliminated numerous exemptions to the existing 4 cents of sales tax for three months and then only for 2 cents for the next two years, in another bewildering list of exemptions.
For both acts, sales tax exemptions drop off or come back at different times, adding to the confusion.
Stokes noted that the new laws keep sales tax breaks for materials used in the production of crawfish and catfish but not for purchases and supplies used by commercial fishermen.
“There’s no reason why some things have been chosen to be exempt and other things not,” Stokes said.
The state Department of Revenue has been doing its best to explain the changes from the two bills. On Monday, the agency released a 26-page matrix listing the new sales tax rate item by item during three different periods: April 1 to June 30 this year; July 1 to June 30, 2018; and July 1 to March 30, 2019.
On Wednesday, revenue officials released a revised version of the 26-page matrix. Now it’s only 25 pages.
“We updated it based on the questions that were raised, to clarify things,” Kimberly Robinson, the revenue secretary, said in an interview, declining to take the bait offered by a reporter to criticize lawmakers’ handiwork. “We are attempting to answer the questions that have come up as a result of the changes.”
She said the biggest questions concern the tax rate for membership dues or fees for nonprofit groups. Until now, those dues or fees were exempt from the previous 4-cent state sales tax.
Now the state sales tax rate on those memberships will be 5 percent from April 1 to June 30, 3 percent for the next two years and then become exempt again after that.
Robinson suggested — but would not say outright — that the agency will show some understanding as retailers, nonprofits and businesses cope with the immediate changes.
Some leniency would be good news for the members of the National Federation of Independent Business, said its state director, Dawn Starns.
“Our members are anxious about what is expected of them,” Starns said.
The changes “are good for consultants,” said Steven Sheffrin, a Tulane economist and tax expert.
The Louisiana Association of Business and Industry is hosting a seminar on the changes to tax law made during the special session. It’s free for its members and $25 for everyone else.
Scott Drenkard, the director of State Projects for the Tax Foundation, said Louisiana is ranked 50th because of its high sales tax rate (which was third highest but now is first), the complexity of its system (because of the nearly 200 exemptions) and having exemptions for some items on a parish by parish basis.
“Some items are so unique to Louisiana that they aren’t even captured in the ranking, like having some 60 different sales tax collectors throughout the state,” Drenkard said. “Louisiana has a high tax rate plus a poor base structure plus administrative problems,” said Drenkard.
It should be noted that the Tax Foundation’s rankings are hardly the last word on taxes. The group lists South Dakota and Alaska as having the second and third best overall “business tax climate,” but both states are floundering in a sea of red ink following the drop in oil prices.
With an increasingly complicated tax system — and needing to raise more money — Louisiana legislators created a task force to study the tax and budget system and issue a report on Sept. 1.
Legislators are increasingly saying they believe they can use the task force’s recommendations as a basis to carry out some sort of tax reform, including the sales tax system.
“By next year, we need to straighten this out,” Stokes said.
In the meantime, several members of the task force were flummoxed last week when Robinson described the recent sales tax changes.
“We have made our sales tax system even more confusing,” said Jim Richardson, an LSU economics professor who co-chairs the tax force with Robinson.
“It can’t be any worse,” chimed in Jason DeCuir, a business lobbyist on the panel. “We’re already at the bottom.”
Rueful laughter erupted in the room.
“The Tax Foundation will find a new category for us,” added Richardson, to more laughter.
Drenkard already is aware of the latest changes. He printed out the Department of Revenue’s 26-page matrix — with its different exemptions and different phase-out dates — and felt compelled to walk it around his office to show it to his colleagues.
“I’ve never seen anything like it,” he said in an interview.
Asked if he might find a new category for Louisiana because of its sales tax system, Drenkard laughed and said, “I won’t bounce it out of the Union. I don’t have the power. Besides, I still want to be invited back to the state.”
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