Tackling Tax Troubles: What’s Next?
Top local tax attorneys provide forecasts and offer their take on what inevitable changes will mean for business.
ith the election of President Donald Trump at the national level, and the current (and, perhaps, perpetual) Louisiana budget crisis at the state level, 2017 promises to be a year of tax law changes.
In his role as tax team leader for Adams and Reese, firm partner John F. “Johnny” Lyle III oversees the work of 10 tax attorneys that work with clients that range from individuals to 501(c)3 nonprofit organizations to publicly held corporations.
“President Trump talks about cutting corporate tax rate to 15 [percent],” says John F. “Johnny” Lyle III, a partner at Adams and Reese law firm. In his role as tax team leader at the firm, Lyle oversees the work of 10 tax attorneys that assist clients ranging from individuals, to 501(c)3 nonprofit organizations, to publicly held corporations. “We have the highest corporate income tax rate in the world,” Lyle says. “And we have very narrow brackets — the maximum corporate tax bracket is 35, so cutting it down to even 25 is pretty dramatic, and it’s going to hit [businesses] pretty quickly as compared to such a cut for an individual.”
On the state level, Lyle explains that Louisiana has a task force established on how to plug the deficit. “The problem is between now and 2018, when the Restore Act dollars from BP become available, there are some large deficit numbers projected,” he says. “Last year, the Legislature rushed through some bills to eliminate sales tax exemptions, and this had a significant number of unintended consequences. Gov. Edwards has also indicated a hit list of credits that might be at risk in 2017. He’s looking almost exclusively at increasing revenues versus cutting expenses. A business can’t get to do that. But that’s his platform; he thinks the budget’s already cut to the bone.”
Lyle also points to “under the radar” changes in Social Security and Medicare thresholds. This year, both employers and employees will pay 7.6 percent into Social Security on the first $127,000 in income, up from $118,500 last year. Additionally, a new 3.8 percent investment income tax on individuals making more than $250,000 is one of about 20 taxes, along with a medical-equipment tax, in place to help fund the Affordable Care Act. “It’s a thinly disguised Medicare tax,” Lyle says. “Trump is going to get rid of that.”
In Louisiana, Lyle cites as his top concern — amid the state budgetary crisis — a Louisiana Department of Revenue that is “overworked, understaffed and not being as diligent as they should in responding to taxpayer appeals.” He describes the lack of response in the appeals process as “the product of a state desperate for money.”
William M. “Bill” Backstrom Jr., leader of Jones Walker’s Tax and Estate Practice Group, calls the current state fiscal crisis “unprecedented.”
“Last year we had two special sessions of the Louisiana Legislature sandwiched around the regular session to solve the budget crisis and, even with all the work, we’re still $300 million short,” he says. “The legislators spent a lot of time figuring out how to raise tax revenues in 2016, and look what happened: The substantial tax burden fell on businesses in the form of increased sales-tax rates, reduction in some of the eligible exemptions, business sales tax increases, and franchise tax increases, while also extending the franchise tax to cover limited liability companies.”
Otherwise, business in Louisiana is doing pretty well, Backstrom explains, noting the oil and gas industry is coming up from its recent downturn, large-scale industrial-development projects are percolating, and the state is still considered attractive to businesses in terms of tax credits and “tried-and-true” incentives.
For the 2017 Louisiana Legislature session — convening April 10 — Backstrom says his top concern is lawmakers “enacting changes to the tax code that are retroactive, which is just wrong and against the way business operates,” along with “expanding the state’s sales-tax reach across our borders” by requiring online sellers to collect sales tax.
“We have to create opportunities for businesses,” he adds, “while also creating a tax system that is fair and gives us the certainty Louisiana needs.”
Changing political winds in 2017 also look to impact how business is conducted on a global scale. “The biggest thing with taxes on an international level is the scheme under Trump and Congress to change our border-adjustment tax to where basically all our imports are being taxed while our exports aren’t,” says Edward “Ted” George, who provides general counsel to local corporations through his practice at Chaffe McCall, “This may not pass muster with the World Trade Organization [WTO], which objects to taxes that unfairly burden international trade. The WTO wants to get rid of tariffs, like the recent tax on importation of steel. Reversing that would be action at the WTO level.”
George says at this stage, “we’re waiting to see what new laws take form. Lower rates are a good thing, certainly, but many businesses are going to want to know what deductions and what special allowances are going to be eliminated. I think a lot of this will unfold in the next several weeks and months.”
A Blueprint for Tax Reform
The Louisiana Legislature’s task force lays it all out.
On January 27, the Task Force on Structural Changes in Budget and Tax Policy presented its final report, “Louisiana’s Opportunity: Comprehensive Solutions for a Sustainable Tax and Spending Structure.”
Several Biz New Orleans sources pointed to the findings of the task force—a 13-member group led by co-chairs Kimberly Robinson, secretary of the Louisiana Department of Revenue, and Dr. James Richardson, professor of economics and public administration at Louisiana State University—as critical to solving Louisiana’s current budget crisis and having the potential to avoid another in the future.
“To me, this final report is a blueprint of the tax reform we need in Louisiana,” adds William M. “Bill” Backstrom, Jr., tax and estate practice group leader of Jones Walker. “The 2017 legislative session presents a real opportunity for businesses to have their voices heard on this issue.”
Established by the Louisiana Legislature during its first special session of 2016 to create “a specific plan for long-term tax policy that may be used to introduce legislation no later the 2017 Regular Session of the Legislature,” the Task Force held public meetings March through October 2016.
The following is a “summary of recommendations” from its 71-page final report:
• Louisiana’s Fiscal Mess: If we want to solve fiscal problems and not repeat mistakes of the past, we need to know how we got to where we are.
• Spending Practices and Management: Our chronic budget shortfalls and biggest inflationary costs must be addressed with long-term treatments and better fiscal discipline.
• Problems with Louisiana’s Tax System: Let’s understand what’s wrong before we try to make it right.
• Tax Reform Solutions: We need a combination of new, old and bold ideas based on sound principles to create a better tax structure.
• State and Local Relations: We must address the close relationships of state and local spending and revenue and their impacts on all citizens and levels of government
View or download the Task Force’s Final Report PDF,visit revenue.louisiana.gov and click under “Laws and Policies”.