Highest In the Nation: Louisiana’s Sales Tax Needs Reform
The House of Representatives Ways and Means Committee is currently in the process of studying the state’s tax structure, due to a resolution brought by Representative Richard Nelson. In an upcoming meeting, the committee will begin a discussion on the status and structure of the state sales tax.
Louisiana’s sales tax rate, currently at 9.55%, ties Tennessee as the highest in the nation (however, unlike Louisiana, Tennessee does not have a personal income tax). The rate includes 4.45% for the state, and an average of 5% for local governments. Louisiana’s sales tax produced $3.6 billion in revenue in 2021, which made up 35% of state revenue. It is the second largest source of revenue for the state, just behind the individual income tax.
Sales tax is taken at the point of sale at retail, use, consumption, distribution, and storage for use or consumption of each item of tangible personal property. It is also levied upon the lease or rental of tangible personal property within the state. Only eight services are currently subject to state sales tax, they include: hotel rooms, admission to athletic, recreational, amusement, and entertainment events, parking privileges, printing services, laundry services, storage space, repairs to tangible personal property, and telecommunications services.
Louisiana’s state sale tax includes many exemptions. This means certain groups are exempted from paying sales tax, or certain items are not subject to the sales tax. As of 2015, there were 191 items exempted or excluded from the sales tax. Services, other than the eight previously mentioned, are also currently not taxed. For example, when you bring your car to the mechanic, they will charge sales tax on any items that are sold, but there is no sales tax charge on the labor portion of your bill.
In 2016, the legislature passed a bill to add 1% to the sales tax, bringing the state rate from 4% to 5%, and extended all the exemptions to that additional rate. This was done to raise immediate revenue to fix the looming budget deficit. However, this additional tax created nearly $1 billion in additional revenue to the state, far more than was necessary to “fix” the budget deficit. This increase was only for 2 years. When it was set to expire in 2018, it would create yet another budget deficit.
The legislature reconvened to reconsider whether or not to keep the increase. The compromise issued would be to raise the sales tax by only .45%, slightly less than half of the increase from two years before. In the bill that raised the sales tax, the legislature decided to maintain some of the exemptions, but removed several others. There are still 119 exemptions in effect, worth approximately $2.4 billion in 2021. Three of the five largest exemptions are found in the constitution: food for home consumption, prescription drugs, and residential utilities, which are worth approximately $1.03 billion in 2021. When this tax increase expires in 2025, all of the exemptions that were removed in 2018 will come back into effect.
The effect of exemptions from paying taxes is essentially a tax increase on everyone else. Because there are so many exemptions, the tax rate must be higher than it would otherwise need to be in order to raise the same amount of money.
Tax experts generally recommend that sales taxes should be “broad-based”, meaning taxes should apply to all final sales of goods and services, but not on business-to-business transactions in the process of producing the final product. An example would be that the state would tax the sale of a lawnmower to a consumer, but they wouldn’t tax the steel that goes into making the lawnmower. These recommendations would result in a tax system that is not only broad-based but also “right-sized,” applying only once to the final product.
Sales taxes are just one part of an overall tax structure in Louisiana that should be considered for reform, including personal and corporate income taxes, and the corporate franchise tax. For example, Tennessee has a high sales tax rate, but they eliminated the income tax, whereas Oregon has no sales tax but higher income tax rates. Louisiana, unfortunately, has both. Legislators should consider a broad-based sales tax, removing many exemptions to lower the overall rate paid by consumers. Sales taxes should also be right-sized, applied only on the sale of the final product so that it is only taxed once. With reforms like these, Louisiana can lessen the tax burden for all of us.