A Controversial Proposal to Eliminate a Controversial Tax Credit
BATON ROUGE (Louisiana Illuminator) — The Louisiana Legislature will be asked to do away with a long controversial business tax break and remove the tax burden of some of the state’s highest-earning companies. How the proposals would affect the bottom line of the state and local governments, as well as individual taxpayers, is yet to be determined.
Sen. Brett Allain, R-Franklin, has proposed two measures to reduce or eliminate Louisiana’s inventory tax credit. One would eliminate corporate income taxes for companies in the state’s highest tax bracket, while the other would codify into law changes to the Industrial Tax Exemption Program.
Senate Bill 4 would reduce rates in the first two corporate income tax brackets and eliminate the top bracket altogether. Currently, the top bracket carries a 7.5% tax on income above $150,000.
In a phone interview Wednesday, Allain, who has spearheaded a number of tax bills throughout his tenure, said the bill is revenue neutral because it would partially repeal the state’s inventory tax credit to offset the revenue loss. Debbie Vivien with the Legislative Fiscal Office said its staff is still calculating the fiscal impact of Allain’s bill.
Legislators have long lamented the inventory tax credit as a costly cog within an already complicated machine of business taxation in Louisiana. Budget watchdogs see the credit as a drain on state finances and a way for businesses to shift their tax burdens onto residents and homeowners. Allain has in the past tried unsuccessfully to dismantle the inventory tax and its corresponding credit.
The Louisiana Constitution authorizes local governments to set and collect inventory taxes, but the state — through the inventory tax credit — reimburses businesses that pay those taxes. Lawmakers can eliminate the inventory tax credit through legislation, but doing so would mean businesses would have to start covering their own inventory tax bills.
Allain said his legislation offers a compromise, giving corporations lower income taxes in exchange for getting rid of the inventory tax credit that costs the state an annual $280 million.
However, not all businesses would lose the credit. The bill would still allow sole proprietors, partnerships and limited liability companies (LLCs) to claim it, though Allain said about 75% of the credits are claimed by corporations.
“We are one of only 10 states that the locals charge an inventory tax and only one of two states that have a credit of this magnitude,” he said. “The corporate income tax rate is inflated to cover this credit, and it is hard for us to compete nationally with this high of a rate.”
While the state might break even, the measure could be a boon to wealthy businesses that carry little or no inventory and stand to gain from the elimination of the top corporate tax bracket.
The Louisiana Budget Project’s Jan Moller questioned the proposal’s impact on other taxpayers.
“If profitable corporations are going to pay less, who’s going to pay more?” Moller said.
Louisiana’s corporate income tax brought in roughly $567 million in net revenue during the 2020-2021 fiscal year, but it is unclear how much of that might be lost if the top bracket is eliminated.
The estimate is particularly difficult because the state’s current corporate income tax brackets and rates are barely a year old. Allain was the architect of the currently new set of tax brackets approved in the 2021 legislative session that reduced rates for corporations and individuals.
If Allain’s bill fails to gain momentum, he has an alternative proposal that would tackle both the inventory tax problem and offer a solution to the soon-to-expire reforms behind the state’s Industrial Tax Exemption Program (ITEP), which offers property tax exemptions for certain companies.
Allain’s Senate Bill 2 proposes a constitutional amendment to phase out the inventory tax over a five-year period and caps ITEP exemptions at 60% for local school board property taxes and 80% for all other property taxes.
Phasing out the inventory tax would indirectly phase out the inventory tax credit without leaving businesses to cover their local tax bills. However, getting rid of inventory taxes would deprive local governments of a significant source of their revenue.
To lessen the sting to local governments, Allain’s bill offers a permanent version of some of the 2016 ITEP reforms that Gov. John Bel Edwards ushered in through executive orders that reduced the amount of the property tax exemption and added local control to the approval process. Before the 2016 reforms, ITEP carried a 100% property tax exemption, and the state Board of Commerce and Industry had sole authority to decide on applications.
The reforms made ITEP applications go before local taxing bodies — such as school boards, sheriffs, and parish or city councils — for approval of up to 80% exemptions on property taxes for 10 years.
With Edwards’ final term ending this year, many local officials and taxpayers have expressed concern that a new governor might reverse the ITEP changes.
Allain’s Senate Bill 2 would not codify local control of ITEP approvals, but it would guarantee a 60% cap on exemptions of school district taxes and an 80% cap on other ad valorem taxes.
Erin Hansen with Together Louisiana, an umbrella organization of nonprofits that has long opposed ITEP, said the bill fails to retain the most important aspects of Edwards’ reforms. She called it a “bad deal for the locals.”
Allain said guaranteeing 20% for local governments is better than the alternative, which could be nothing if the legislature continues its current trend of balking on the ITEP issue.
“When he goes away at the end of the year, so does his executive order,” Allain said of the governor.
Previous attempts to cement any of Edwards’ ITEP reforms into statute have all failed to pass the legislature. Although some lawmakers have voiced support for the reforms, they haven’t backed them with votes. When one such proposal hit a roadblock last year, Sen. Jay Morris, R-West Monroe, suggested a compromise amendment that would have given local taxing bodies control of a portion of the property taxes due to them, but even that effort failed.
At the time, Morris said forces conspired against his amendment because they wanted to see ITEP returned to its full exemption status after Edwards leaves the governor’s seat in 2024.
Both of Allain’s bills will likely go before the Senate Committee on Revenue and Fiscal Affairs once the 2023 regular session begins April 10.
By Wesley Muller