The Truth About Taxes
If you peel back the layers of Louisiana’s tax structure, you’re likely to find confusion, outrage and, more importantly, room for improvement. (Plus, you just may discover the reasons why we’re suffering another midyear budget shortfall.)
By JEREMY ALFORD
Aside from cinching the SEC, carrying the brand of Raising Cane’s and building a national media profile around the idea of tasting grass, Les Miles knows how to stir the gumbo pot of south Louisiana just right. Debating his quarterback choices and play calls has become ritualistic for residents of Red Stick and beyond.
But the so-called “Mad Hatter” has decent business chops, too, and that’s worth a few words. As LSU’s head football coach, Miles is at the receiving end of one of the largest consulting contracts in the state. It’s a standalone deal with Louisiana State University A&M, separate and apart from his coaching salary. (Editor’s Note: According to the Division of Administration, LSU funds the government-approved contract solely through self-generated revenues and fees.)
According to documents obtained by THE PELICAN POST, Miles created Just Ball, Inc., which is based in Dallas, TX, to facilitate the state contract. In exchange for $8.8 million, Just Ball provides the “services of Les Miles, coach, to the university to assist in producing and providing radio, TV and Internet programs.”
The contract started Jan. 1, 2010, was officially approved by the state some 21 days later and is scheduled to terminate Dec. 31, 2012. But the most interesting aspect of this arrangement is that Miles created a Texas-based corporation to handle the business side of his Louisiana-based consulting work. Why would the Hatter do that?
Kevin F. Roach, an executive accounting professor at Texas A&M University, says there are a number of protections afforded by such corporations, like shielding from personal liability. But he says it’s also becoming a trend for major earners with diversified income streams to use these corporations as a pension plan of sorts, meaning the money sits in the business until later in life.
Yet there’s something even more appealing than the legal niceties. Texas is among nine states, along with Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Washington and Wyoming that have no personal income tax, as defined in the most traditional sense.
While the Hatter’s company is certainly paying business taxes in Louisiana, it’s also quite possible that any personal income he receives from the flow-through entity would be tax-free. “It’s not an uncommon strategy,” says Roach. “And it’s difficult to criticize Coach Miles for using a form of organization that provides certain benefits.”
Depending on your view, this makes Texas more competitive than Louisiana — if not in football, at least on the income tax front. Based on tabulations from the U.S. Department of Commerce, Texas has the fifth lowest per capita tax collections, or just $1,646 per resident. Louisiana, in comparison, ranks 29th with per capita collections of $2,229, just $105 short of the overall U.S. average.
To invoke the Hatter once more in the name of illumination and narration, Louisiana ranks significantly higher in relation to income tax burdens than other SEC members states like Mississippi, Alabama and Georgia.
Most good-natured, football-watching folks in Louisiana probably aren’t even aware how dependent the Bayou State has become on income tax collections. The latest figures available from the state, for instance, show that cash collected from the individual income tax is dangerously close to surpassing the loot generated by the state’s sales and use tax. Both taxes account for about 60 percent — each is nearly 30 percent — of Louisiana’s annual tax haul.
For a state-by-state breakdown of tax collections, click HERE.
What states like New Hampshire and Texas lack in income taxes, they more than make up for in property taxes. Both states, possibly as a result of nixing income taxes, have some of the most exorbitant property taxes in the nation. Still, the idea of no income tax is appealing to many. In Oklahoma, for example, officials are considering axing the income tax and modeling its tax structure after Texas’ system.
Oklahoma Gov. Mary Fallin, a Republican, has created a task force to move the idea forward. Lawmakers there also held a hearing on the proposal last month and were told by three university economists that repealing or altering the personal income tax, which bankrolls one-third of Oklahoma’s public services, would have to be accompanied by a plan to replace the lost revenues.
State Rep. David Dank, a Republican who represents portions of Oklahoma City, is doing some the grunt work, like lining up votes and framing debate points. He says that a recent analysis of 2010 Census data showed that of the nine states with no income tax, seven were among the fastest growing in America.
A direct payoff of that growth came this year when Texas and Florida gained new congressional seats. Conversely, states with higher personal income taxes like California, New York and even Louisiana lost seats — and population. “People go where they are not taxed to death,” Dank says.
Louisiana, in fact, hosted its own debates over phasing out the income tax earlier this year. As expected, the proposal went nowhere fast, but certainly livened up the 2011 regular session.
Like business interests in Oklahoma right now, some trade groups in Louisiana expressed concern over how the lost revenues would be replaced. Specifically, the big fear was that property taxes would be notched up to compensate. In general, property taxes are often viewed by industry as having a strong negative effect on business, especially since they’re paid regardless of profit or loss.
Dan Juneau, president of the Louisiana Association of Business and Industry, says that from a business perspective, eliminating or phasing out the state income tax could be a positive element for economic development. But it would largely hinge on how the policy is constructed. “What many business owners would fear would be that individuals would be treated fairly in any income tax repeal proposal, but businesses would end up being taxed more to pay for it,” Juneau says.
He adds that the states with no income tax generally have very high sales taxes and higher-than-average property taxes. “Those states also tend to subsidize local governments much less than we do in Louisiana,” Juneau says. “None of them have state supplemental pay for fire and police and few of them have the parish road funds and other subsidies for local governments that we provide.”
Those states aren’t dependent on personal income tax collections like Louisiana, either. And, at least lately, that dependency has come to bite state planners in the you-know-what. Personal income tax collections have dropped so severely that they triggered midyear budget cuts this month. For the current fiscal year, collections are off by roughly $142 million, accounting for a large portion of the reductions that are now being implemented by the administration.
In all, $251 million worth of cuts have been ordered up for the current fiscal year. Commissioner of Administration Paul Rainwater contends they’re being made in a way that reorganizes spending expectations. “These reductions are targeted so that we protect critical services even as we tighten our belt and reform and restructure government to do more with less,” he says.
To perform a detailed search of parish tax rolls, click HERE.
While it’s unlikely you’ll find them at a tea party gathering, there are those who argue that Louisiana’s property taxes have ample room for growth due to the low current rates. How low are Louisiana’s property taxes? There are only four or five other states that collect fewer property taxes than Louisiana, depending which statistics you want to believe.
On the state level, Louisiana has a homestead exemption that has remained unchanged since the Great Depression. The exemption protects the first $75,000 of assessed value from being taxed. It is the lowest such rate in the nation and roughly two-thirds of the homes in Louisiana are exempt from property taxes.
As for the local level, that’s an entirely different beast. Local taxing authorities collect more than $2 billion annually from Louisiana property owners. That’s considerably lower than most other U.S. states, but you won’t hear that kind of talk from residents of Cameron Parish.
That’s where local property taxes per capita weigh in at $5,798, according to the Louisiana Department of Revenue. It’s a far cry from the $132 per capita rate enjoyed by residents of Avoyelles Parish. With just a glimmer of irony, it’s important to note that Avoyelles has a population of 42,000 to Cameron’s 6,800.
For a parish-by-parish breakdown of tax collections, click HERE.
In Louisiana, state and local governments partially make up for reduced property revenue through above-average use of sales taxes. That was just one of the findings from a Louisiana Public Square broadcast that was dedicated to the topic of property taxes a few years ago. To put that finding into perspective today, bear in mind that Louisiana now has the eighth costliest sales tax system in the nation.
Mark Robyn, staff economist for the D.C.-based Tax Foundation, a think tank that focuses on tax policy, says there’s cause for concern in this area. “The fact that Louisiana allows localities to add on additional sales taxes and, more importantly, define their own tax base — to some extent — adds undesirable complexity for businesses,” he says.
In return, local governments take advantage of that right with gusto in certain cases. In West Baton Rouge Parish (pop. 23,700), sales taxes per capita are $990, the highest in the state. Grant Parish (pop. 22,300) is on the other end of the spectrum with a per capita rate of just $43. Just like local property taxes, local sales taxes are applied with little reason, especially if you continue to take into account population figures.
Additionally, Robyn says all business-to-business transactions should be exempt from sales taxes in Louisiana, “since the sales tax is supposed to be a tax on consumption and business transactions are not consumption.”
The foundation’s most recently published “State Business Tax Climate Index” ranks Louisiana 36th overall. While the study is focused on business tax issues, it also incorporates personal income taxes, sales taxes and property taxes, in addition to the more obvious business taxes. For example, the Bayou State’s unemployment insurance tax system is actually among the nation’s top five, in terms of being business-friendly.
For Louisiana, though, the report isn’t all lollipops and sunshine. When it comes to the individual income tax, for simplicity and consistency at least, Robyn says it would be wise if Louisiana recognized the federal business forms. Currently, LA does not recognize S-Corp status. “Louisiana also has a capital stock tax on corporations, which is a damaging and outdated tax that only still exists in a few states,” he says. “The state further levies an inventory tax, another unjustifiable tax that only a handful of states levy.”
The state’s economic development arm argues that there’s a qualifier: “In Louisiana, when a business files its state income and franchise tax, it can simply claim the amount it paid to local authorities for inventory taxes as a refundable credit. If the inventory taxes paid to the local authorities exceed the company’s state income and franchise tax liabilities, the company gets the balance as a refund.
For a closer look at Louisiana’s overall tax collections, click HERE.
In Louisiana, tax collections ain’t what they used to be. In fiscal year 2006, the state collected $7.5 billion in taxes. A decent haul. Two years later, the tally reached $9.1 billion. Then in fiscal year 2010, the most recent data set available from the state Revenue Department, collection reached only $6.9 billion — a five year low. Economists point to an unnatural spike in 2008 due to spending related to hurricane recovery efforts and an influx of new dollars from federal level.
For now at least, the Bayou State’s political class isn’t exactly tripping over itself trying to replace the losses with new taxes or other revenue generators. Gov. Bobby Jindal, for one, is opposed to taxes. No exceptions. He even opposed a tax renewal for cigarettes earlier this year. The additional dollars were tied directly to health care and it was left up to statewide voters this fall to approve the renewal, which they did.
As a result, Louisiana has become more dependent on tax collections from sales and individual income over the past four years. In fiscal year 2010, sales tax collections topped $2.4 billion, with individual income tax collections trailing closely behind and generating $2.2 billion.
The corporate side of the picture is dramatically different and looking sluggish. Using fiscal year 2010 as a benchmark, corporate franchise tax collections statewide are down $116 million and corporate income collections dropped by $70 million, compared to 2006 collections.
So, aside from creating new taxes, how can the state increase collections? One approach simply involves collecting what taxpayers owe. For starters, perhaps it’s time for lawmakers to take a closer look at the state Revenue Department’s “offer in compromise” program.
Louisiana law authorizes the secretary of revenue, under certain conditions, to compromise on a judgment for taxes. Under this authority, the secretary can accept less than full payment as a final settlement for a state tax liability. In theory, a compromise is triggered when the secretary has a “serious doubt” as to collectability of the tax due or the cost the collection would inflict on the state. The judgment for taxes compromised must be $500,000 or less, excluding the applicable interest and penalty.
The largest offer in compromise last year was dealt out to Todd Matherne. It was a unique case in which Matherne, a Houma resident, was expected to pay more than $52 million in taxes last year, which was ultimately negotiated down to just one payment of $2,000. To be more specific, the state wanted Matherne to pay for taxes related to “drug stamps.”
Matherne was arrested in 2005 for selling steroids and somehow Louisiana’s drug stamp law — $3.50 per gram of marijuana and $200 to $400 per gram or dosage unit for harder stuff — was applied to his case. It originally cropped up as a $47 million tax lien after he was convicted.
The drug stamp law, which has been challenged with some success in other states with similar statutes, is a bit of a gimmick; it’s meant to force drug dealers to pay a tax on their wares and anyone who fails to purchase the special stamps — a possible admission of guilt in and of itself — can be forced by the state to pay twice the amount of tax owed.
Are you thinking about trying to cheat the tax collectors? You may want to read THIS first.
Matherne is just an oddity of note. The Revenue Department abated $315,000 for another 22 taxpayers during fiscal year 2010. The sweetest deal went to Mac and Karen Shachat — the department releases first and last names only — who paid $27,600 on a $115,000 tax bill. Harold and Karla Temple, meanwhile, ponied up a $20,000 payment after avoiding a $41,000 lien.
While offers in compromise don’t leave an overwhelming amount of money on the table, citizens who avoid paying taxes altogether do represent a real and present threat. These deadbeat taxpayers literally owe millions to the state — millions that could help ward off budget cuts in areas like education and health care.
There have been efforts in the past to ramp up the Revenue Department’s collection efforts. The now-defunct Commission on Streamlining Government had such a recommendation that was never acted upon: “If the decision is made to re-orient the audit philosophy to one of aggressive pursuit of tax fraud, there is the potential for significant additional revenue to the state. This does not require a tax increase; rather it is the collection of taxes already due. This helps level the playing field for those businesses that are compliant with Louisiana tax laws by eliminating the financial advantage to tax cheats.”
The department has been proactive in the past, but that same kind of ingenuity has been lacking in more recent years.
In 2009, the department oversaw a special amnesty program that allowed individuals and businesses to pay back taxes without a penalty. It collected $545,000 during first five days of September that year. Four weeks later, the total stood at $300 million. By Christmas, the special one-time program was good for $450 million in revenues.
In 2001, the department launched a gotcha program under the moniker of CyberShame. An appropriate name if there ever was one — that’s because the online campaign kicked off by publishing the names and addresses of 117 delinquent taxpayers that owed more than $9 million. Only the most chronic were included. More than $469,000 was collected as a result.
Plus, an additional $194,000 was collected from delinquent taxpayers who said they didn’t want their names published in the future. Another 103 names were added to CyberShame later in 2001. Since then, however, the shame game hasn’t been the same and the department has removed the list from its Web site.
There’s also existing policy that can be built upon. In 2003, the Legislature enacted a law permitting the Department of Wildlife and Fisheries to revoke fishing and hunting licenses of anyone who owes more than $500 in delinquent individual state income taxes. State law likewise calls for driver’s licenses to be suspended or denied for taxpayers owing than $1,000.
For a listing of recent offers in compromise approved by the state Revenue Department, click HERE.
There’s nothing easy or simple about Louisiana tax structure. On one hand, Louisiana’s state and local tax burden is fairly low, roughly 8 percent of income, which is 42nd in the nation. On the other hand, a recent report compiled by the Center on Budget and Policy Priorities found that Louisiana was one of 11 states in which a single-parent family of three living at the poverty line still owed state income taxes.
While there’s a strong argument for the Department of Revenue to improve its collections efforts, it appears to be more interested in cyber taxes this holiday season. And for good reason. It’s estimated that Louisiana could gain upwards to $400 million if online sales were properly taxed and collected.
Then there’s the so-called Stelly Plan. Voters approved the complicated tax swap plan as part of a constitutional amendment in 2002. It eliminated state sales taxes on groceries and residential utilities in exchange for increased income taxes on higher income residents. Confusion has become a hallmark of the Stelly Plan, specifically the question of whether it has done more good or bad.
In an exclusive interview with former state Rep. Vic Stelly, the plan’s namesake, Associated Press reporter Melinda Deslatte attempted to peel back the layers. Even though the income tax portion of the Stelly Plan has repealed, it apparently remains a “hot topic” for politicians and taxpayers alike.
“I went to a McNeese (State University) basketball game, and I talked to a guy at the concession stand, and he said, ‘Well, thank God you’re gone. You cost me a lot of money,'” Stelly told Deslatte, noting that a few minutes later at the snack stand, another man walked up and took the other side of the argument.
Deslatte also links the dip in recent tax collections to the Stelly Plan and its policy wake: “The tax increases were rolled back in 2007 and 2008 after public backlash, and the sales taxes were never put back in place by lawmakers, so the changes cut taxes by more than $600 million annually, worsening budget shortfalls in the last few years.”
To learn more about another well-known politician who left his mark on income tax laws, follow this LINK.
Tax exemptions can likewise boggle the mind when measuring the effectiveness of Louisiana’s tax structure.
Gov. Bobby Jindal, for one, has credited a few different tax exemptions in the past with helping lure major companies to Louisiana. He has even “rejected calls to review the various tax breaks on the books, calling the removal of exemptions and credits a tax increase.”
Yet there are signs that tax exemptions could be getting out of hand, depending on your perspective. During this year’s regular session alone, new tax exemptions were created for the Cane River Heritage Area, parish councils on aging, breastfeeding items, physicists residency programs, orthopedic devices, alternative fuels for manufacturing and Brad Pitt’s Make It Right Foundation.
Just consider the following three sets of numbers, based on data provided by the Louisiana Department of Revenue:
— $13.3 billion, which represent the total potential tax collections for fiscal year 2009-2010
— $6.6 billion, which was the amount of taxes actually collected and deposited into the treasury that fiscal year
— $6.7 billion, which was the balance, or, rather, the amount that was prohibited from collection due to tax exemptions, credits and other similar mechanisms
The Louisiana Budget Project argues that the $6.7 billion going uncollected due to exemptions is part of a “hidden budget.” This is how the group explains it in a recent report: “It’s the total of more than 440 separate pieces of legislation, each of which exempts someone or something from some form of taxation. While the regular state budget is made up of money the state takes in and then sends back out, the hidden budget is money the state decides to forego in the first place.”
Even the Department of Revenue defines tax exemptions as “tax dollars that are not collected and result in a loss of state tax revenues available for appropriation… in this sense, the fiscal effect of tax exemptions is the same as a direct fund expenditure.”
Sometimes these exemptions can have a heavy impact, and the current fiscal year is a prime example. While declining personal income tax collections have been blamed for the midyear shortfall, they’re not the only culprits. Collections related to the oil and gas severance tax are slated to miss their mark this fiscal year by about $128 million.
Greg Albrecht, the chief economist for the Legislative Fiscal Office, has suggested that lawmakers might want to take a second look at a particular severance tax exemption on horizontal drilling, which helped fuel the craze of recent years emanating from north Louisiana’s Haynesville Shale area. Proponents believe that could help several tax collections inch back up.
Don Briggs, president of the Louisiana Oil and Gas Association, isn’t sold on that. He says any kind of repeal would be “shortsighted” since Louisiana would have missed out on more than $40 billion in direct and indirect economic growth between 2008 and 2010 without the exemption, by LOGA’s accounting.
“This incentive is essential to driving investment in our state and ensures the equitable development of deep and capital-intensive oil and gas projects,” says Briggs. “It is our belief that a repeal of this incentive will exacerbate the decline of the Haynesville Shale development and drive away investment from emerging resource plays across the state.”
With the next regular session right around the corner, though, that debate is far from over. Plus, it’s doubtful that repealing this single exemption would have much of an impact — just consider the overall scheme of exemptions.
During fiscal year 2010, potential collections for individual income taxes totaled $3.3 billion, although $2.2 billion was actually collected due to exemptions. The corporate side, though, is where the action is when it comes to exemptions. Of the $1.7 billion in potential collections for corporate income taxes in fiscal year 2010, only $435 million was actually collected.
The Louisiana Budget Project and Department of Revenue, however, may be overlooking other benefits that take the place of the lost tax collections. The Digital Media Tax Credit, a Jindal program, is a perfect example. Jindal had hoped that the tax credit would generate new investments in this burgeoning field. His answer came when Electronic Arts, better known as EA, set up shop in the Bayou State.
Moreover, Craig Hagen, EA’s government affairs director, says this small corner of the tax incentive landscape helped the company make its decision to move into and expand in Louisiana. “Louisiana’s Digital Media Tax Credit is a strong asset to growing the industry and making the state a global competitor in video game development,” he says.
Hagen says the program allows EA to apply a tax credit of 25 percent on software production and 35 percent payroll expenses related to Louisiana residents. These percentages represent money that would otherwise be going into the state’s coffers.
But there’s a bigger picture. Just look to the Louisiana Digital Media Center on LSU’s campus, which will soon be home to Electronic Art’s North American Testing Center. EA is responsible for wildly popular lines like Madden NFL and Tiger Woods golf, and this is where future versions will be born.
The testing center will be the only such outfit in the entire U.S. and will eventually create at least 600 jobs. The center already employs 200 people today. There’s also a bit of street cred in the digital world that comes with housing an outfit such as EA.
From a policy perspective, there’s certainly room for greater scrutiny when it comes to tax incentives. Prior to this year’s regular session, there were no rules or regulations requiring the Legislature’s money committees to review the state’s tax exemption budgets. But thanks to Act 365 sponsored by outgoing Rep. Michael Jackson, a Baton Rouge Democrat, the committees are now required to review the tax exemption budgets every odd-numbered year.
When added to the growing concerns over competition from other states and a seemingly unfair distribution of local tax burdens and non-aggressive collection efforts and everything else, reforming Louisiana’s tax structure feels like an overwhelming task. “Things are changing dramatically,” says state Treasurer John Kennedy. “Can you believe we’re collecting as much in individual income tax as sales tax? I never thought I would see the day.”
But as complicated as the challenge might be, Kennedy says the best approach may be the simplest. “We just need to make our tax structure less complicated,” Kennedy says. “We need to lower taxes and better leverage potential collections. But it won’t happen overnight. You have to chip away at it over time and do it in a responsible way. Until we’re committed to that idea, I don’t know how changes can be made with the best interests of taxpayers in mind.”
To better understand the growing cost of tax exemptions, click HERE.