Removing imbalances in business taxation

On the heels of the ethics special session, Gov. Bobby Jindal announced the call for a second special session that will include tax relief for Louisiana businesses, as well as appropriations for the $1.1 billion surplus from the 2006-07 fiscal year.

Gov. Jindal proposes to accelerate the phase-outs of both the state sales tax on manufacturing machinery and equipment, and the removal of borrowed capital (long-term debt) from the corporation franchise tax base.

The original phase-outs were enacted into law in 2004 during Gov. Blanco’s first special session.

Additionally, the governor proposes to eliminate 1 percent of the 3.3 percent sales tax paid by businesses on utilities. This 1 percent sales tax is a permanent tax that will need legislative action for it to be repealed – the 2007 Legislature passed a bill repealing it, but the bill was vetoed by then-Gov. Blanco.

The remaining 2.3 percent of this sales tax on business utilities is already scheduled to be repealed on June 30, 2009.

While accelerating these phase-out schedules would be a tremendous step forward, there is more work to be done in these areas.

For example, the original 2004 manufacturing machinery and equipment sales tax phase-out did not go as far as the business community would have hoped. The 2004 law only exempts “machinery and equipment” from the state sales tax, while our neighboring and competing states also exempt many other business inputs and consumable items that are used in the manufacturing process.

The costs for these other items can really add up, since they are used and consumed on a more frequent basis, unlike machinery and equipment that may last for years.

So, Louisiana businesses pay sales tax on items used or consumed in the manufacturing process, and then they add the cost plus sales tax on these items to the cost of the final product, for which sales tax is again collected.

In other words, these consumable items are taxed twice – first to the business that uses them during the manufacturing process, and a second time to the ultimate consumer who pays the cost of the final product.

Not a bad deal for the state tax collectors, but a terrible deal for manufacturers and other taxpayers.

Also, this exemption only applies if the business is a manufacturer with the appropriate North American Industry Classification System (NAICS) designation from the Department of Labor.

The NAICS designation is typically based on workers compensation, insurance, and other factors, but not sales tax considerations. Other states provide a broader definition of “who” qualifies for the exemption, which generally applies to any business actually engaged in manufacturing.

Moreover, the exemption only applies to the “state” sales tax (4 percent) and is not applicable to the “local” sales tax, which often exceeds an additional 4 percent. The 2004 law did allow local taxing authorities to also phase out their respective local sales tax on manufacturing machinery and equipment, but to date only a handful have passed local ordinances to do so, such as the cities of New Orleans, Lake Charles and Shreveport, the Jefferson Parish Council, and the Ouachita Parish Police Jury.

If other areas of the state want to be aggressive about recruiting and expanding top-notch manufacturing jobs in their regions, now is the time for them to step up to the plate and follow the example of these areas.

While the 2004 law was a step in the right direction, it did not put Louisiana up there with the competitive tax policies of the more aggressive manufacturing states.

Hopefully, the Jindal administration and Legislature can use the momentum of the successful ethics reform special session to address another area where Louisiana is at or near the bottom – tax policy.