Thursday, May 23, 2024

Homeowners and businesses could face drastic costs if lawmakers exempt inventory tax

by BIZ Magazine

By Wes Muller, Louisiana Illuminator

A Louisiana House panel mulling proposals for sweeping changes to the state’s tax structure was warned Wednesday that drastic tax hikes await homeowners and businesses if lawmakers exempt commercial inventory stockpiles from local property taxes.

Inventory taxes, which local governments use to pay for things such as public schools, law enforcement, hospitals and other public services, contribute up to 25% of ad valorem revenues in some parishes.

The House Ways & Means State Tax Structure Subcommittee is considering ways to eliminate inventory taxes, among others. The state doesn’t collect or rely on inventory taxes for revenue, but it does offer an inventory tax credit. After a business pays its parish tax bill, it can claim a credit on its state income tax return for a large portion of what it pays in parish inventory taxes.

Some lawmakers see the tax and the credit as expensive cogs within an already complicated machine of business taxation in Louisiana, and budget watchdogs see the credit as a drain on state finances and a way for businesses to shift their tax burdens onto residents and homeowners. Subcommittee chairman Rep. Phillip DeVillier, R-Eunice, said the inventory tax credit currently costs the state about $280 million annually.

Lawmakers can eliminate the credit through legislation, but doing so would mean businesses would have to start paying the full amount of their inventory taxes. The move would likely face fierce opposition from corporate lobby groups that have long had a powerful foothold in the State Capitol.

Some legislators have considered exempting inventories from local ad valorem taxes, which would eliminate the tax and the credit altogether — a move that could require a constitutional amendment.

However, testimony Wednesday from St. Charles Parish Assessor Tab Troxler appeared to dispel notions among lawmakers that such a move would be good for any taxpayers in Louisiana.

Troxler presented data on how much parishes rely on inventory tax revenue and said eliminating it would immediately force parish governments to raise property tax rates to cover the gap. St. Charles Parish would lose more than 14% of its ad valorem tax revenue and would have to increase property tax rates on homeowners 17%.

The effect could be even more drastic in parishes heavily reliant on inventory taxes. Eliminating the tax would cause ad valorem revenue losses of almost 25% in West Baton Rouge, 23% in St. James, 22% in Assumption, 20% in St. John the Baptist and 16% in St. Bernard, according to Troxler’s data.

“Tax rates in every single parish — it may be small in some, it may be larger in others — but tax rates across all parishes, property taxes, will increase no matter what this body does,” Troxler said. “That’s going to happen because you have to go ahead and pay those bonds…The minute that the inventory tax goes away, that happens.”

Immediately following Troxler’s presentation, DeVillier acknowledged the shortcomings of such a proposal.

“Mr. Tab, before your presentation, I thought that I had the perfect bill,” Devillier said.

And it’s not just homeowners that will bear the cost. Contrary to what some might think, eliminating inventory taxes would not be good for businesses large or small, Troxler said.

To demonstrate this, he performed a calculation on two companies in St. Charles Parish, showing lawmakers how the elimination of inventory taxes creates a paradox in which local governments collect less yet businesses and homeowners actually pay more in taxes.

In the first calculation, Troxler pulled a 2020 assessment for the Valero Refinery, which paid St. Charles Parish roughly $16 million in total ad valorem taxes (property and inventory). The state then refunded Valero $5 million for the inventory tax credit, reducing the company’s ultimate tax liability to $11 million.

If lawmakers had eliminated inventory taxes, Valero’s total assessment would have been lower, but the increased millage rate and the lack of a credit from the state would have left the company with a higher tax liability of $12.4 million while leaving St. Charles Parish with $4 million less in collections from Valero.

Troxler performed another calculation for a small hardware store in his parish with an assessment of $12,000 in 2020. The calculation produced similar results, raising the store’s tax bill by roughly $1,000 and reducing the parish’s revenue by $5,000.

It’s a situation where everyone would lose — homeowners, large corporations and small businesses — except for state government, which would no longer have to subsidize the inventory tax credit, Troxler said.

“It’s kind of like holding a wolf by the ears,” he said. “You don’t like it but you don’t dare let it loose.”

The Louisiana Budget Project’s Jan Moller said he agrees exempting inventories would cause millage rates to spike. But he added it’s wrong to assume lawmakers would have to eliminate the tax in order to eliminate the credit.

“Some politicians have decided the inventory tax has to go if the credit goes away, but that is a political decision made by people who don’t want to tell the corporations in their backyard that they should pay a little more in taxes,” Moller said.

Instead, lawmakers could eliminate only the credit and leave it to local governments to continue to manage inventory taxes as they see fit, whether that includes keeping, eliminating or adjusting them, he said.

The legislature has reduced the inventory tax credit in recent years. Although it currently costs the state about $280 million per year, it was roughly double that in 2015 when the state faced a massive budget deficit. It came at the end of a lengthy period of drastic income tax cuts and corporate tax incentives under the Bobby Jindal administration. Facing a fiscal crisis, lawmakers passed legislation that limited the inventory tax refunds among a host of other fiscal changes.

Limiting the tax credit has not driven away business, at least in St. Charles Parish. Business inventories, in both volume and value, have actually increased since 2015, and the parish’s tax rolls have expanded, allowing parish taxing bodies to reduce millage rates, Troxler said.

He told lawmakers there are many other tax policies that have a far greater impact on businesses than inventory taxes.

“There’s no way in the world you’d be able to campaign and say, ‘I voted for something that’s going to help small business,’” he said. “I don’t envy the position of the committee, and I’m not advocating one way or the other. I’m just saying this is what’s going to occur.”

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