Gross Receipts Taxes and Governor Edwards' Proposed Budget Stabilization Plan
Friday, March 31, 2017
Posted by: Ann Lupo
Yesterday, Governor John Bel Edwards announced his 2017Budget Stabilization Plan to be debated in the upcoming legislative session that begins April 10. The state is facing a “fiscal cliff” of $1.3 billion in 2018 when temporary taxes go away, and this is the last fiscal session between now and then in which to address the state’s budget issues. He applauded the Legislature’s creation of the Task Force on Structural Changes and Budget Policy last year, which provided the “blueprint” for change.
The Governor's Plan uses several recommendations from the Task Force report, Louisiana's Opportunity – Comprehensive Solutions for a Sustainable Tax and Spending Structure, and also added a new Commercial Activity Tax (CAT) more commonly known as a Gross Receipts Tax. We have been gathering information on the Gross Receipts Tax since we heard last week about the potential for it to be included in the Governor's plan. There are several tax policy aspects of the Gross Receipts Tax that require careful study. The Gross Receipts Tax is not very popular and is only used in a handful of states. See references section below regarding what we've learned about CAT/GRT so far.
Summary of Governor Edwards' Tax Plan:
- Institute a new Commercial Activity Tax (CAT) based on gross receipts for all companies doing business in Louisiana regardless of industry (+$800m-$900m). The corporate income tax would be retained and the greater of the income tax or the CAT would be paid. Any entity with less than $1.5m in gross receipts would pay a tiered amount between $250 and $750 in minimum CAT. For entities making more than $1.5m, the CAT rate would be .35% of gross receipts. Governor Edwards indicated “details would be available in the coming days” and CAT is designed to replace revenue lost when the fifth penny of sales tax “falls off the books.”
- Phase out the franchise tax over 10 years.
- Eliminate the deduction for federal corporate income taxes paid (+66m). Move from five rates to three, and decrease the top corporate rate to: 3%/5%/7%.
- Let the temporary 1% sales tax expire on July 1, 2018 (-$880m).
- Permanently repeal many of the existing exemptions from the remaining 4% sales tax effective October 1, 2017 (+$180m). This is likely to include a sales tax on business utilities, but potentially not for manufacturing utilities. A state sales tax on MM&E will be imposed and collected along with a new rebate.
- Expand the sales tax to certain services on October 1, 2017. The sales tax on services will likely be based on the “Texas model.” Sales tax on professional services is not part of the proposed expanded base (+$200m).
- Eliminate the deduction for federal individual income taxes paid (-$42m). The personal income tax rate would reduce to 1%/3%/5%.
- Make permanent the 28% reductions to income tax credits, exemptions, rebates and deductions (+$193m). Repeal certain exemptions that don’t provide ROI or are not used.
- In the future, set state budgets at 98% of projected revenue in an attempt to avoid mid-year budget reductions.
The plan did not include any specific legislation, and we anticipate more information being available in the coming days. LCPA's Legislative Team will continue to monitor all new tax legislation and keep you informed as the session moves forward. As always, we are eager to welcome your involvement in the legislative advocacy process and happy to answer any questions you may have.
References Related to Gross Receipts Taxes
The Governor's Surprise: How to evaluate the gross receipts tax proposal, PAR Research Brief, Public Affairs Research Council of Louisiana (3/24/17)
The Return of Gross Receipts Taxes, Nicole Kaeding,Copyright ©Jan. 2007 Tax Foundation
Copy-CATs: Commercial Activity Taxes in Three States (3/16/17), Sarah McGahan (Senior Manager, State and Local Tax, KPMG LLP), Bloomberg BNA News, Copyright ©2017 Tax Management Inc.
Gross Receipts Taxes: Policy Primer, Copyright ©2016, MultiState Associates
Gross Receipts Taxes in State Government Finances: A Review of Their History and Performance, Background Paper No. 53, John L. Mikesell; Copyright © Jan. 2007 Tax Foundation
Gross Receipts Taxes: Policy Position, Copyright © Council On State Taxation
The Ohio Commercial Activity Tax: Impact on Pharmaceutical Distributors, Copyright © Healthcare Distribution Alliance
Questions about the content of this Alert should be directed to LCPA State Government Relations Director Linda Babin.