Friday, May 17, 2024

Local governments object to franchise tax repeal, loss of ITEP control

by BIZ Magazine

By Wes Muller, Louisiana Illuminator

Tax proposals that could cost Louisiana and its local governments millions of dollars quietly advanced out of a state Senate committee Monday. 

One of them, Senate Bill 1, sponsored by Sen. Bret Allain, R-Franklin, would repeal the corporate franchise tax by reducing it in equal increments over a four-year period beginning in 2025. 

The legislative fiscal note says the proposal would cost Louisiana $1.57 billion in revenue over the next five years, though Allain has linked the legislation to a companion bill that would phase out the state’s Quality Jobs tax credit program to offset some of the revenue loss from Senate Bill 1. 

The Quality Jobs program, administered through the Louisiana Economic Development agency, offers payroll tax rebates to certain businesses for creating or retaining jobs. The incentive program costs the state millions every year but would only offset about 40% of the revenue lost from repealing the franchise tax, according to the bill’s fiscal note.

The Revenue and Fiscal Affairs Committee received no testimony Monday in opposition to the proposal. No one appeared to speak against or in support of the bill other than Allain himself, who chairs the committee. He led his colleagues in approving it unanimously, saying he thinks the franchise tax is hurting Louisiana’s business climate.  

“In my opinion, it’s been an impediment to us being able to attract good companies here because of the taxation of the capital that they bring,” he said.

The committee already approved the companion legislation, Senate Bill 6, last week. Both proposals are headed to the Senate for a floor vote. 

Another of Allain’s proposals, Senate Bill 2, also passed the committee without opposition Monday. The bill is a constitutional amendment that combines two opposing changes to the state’s tax structure, one to repeal the inventory tax and another to establish limits on the Industrial Tax Exemption Program (ITEP). 

Inventory taxes are a form of property taxes assessed at the parish level and are a vital source of revenue for local governments. Businesses pay the tax on goods and resources held in inventory.

The state doesn’t collect any of that revenue but 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. Consequently, a repeal of the inventory tax would be a $373 million boon for state revenues but would significantly punish local governments. 

Inventory taxes contribute up to 25% of all property tax revenues in some parishes. The second part of Senate Bill 2 would offset some of the hit to local governments by capping ITEP to 60% of the assessed value for property taxes levied by school boards and 80% for all other local taxing bodies. 

The decades-old ITEP program once gave large manufacturers 100% tax exemptions on their property with no requirements that they create jobs or show some kind of benefit to the community. Property taxes are a primary source of revenue for local governments to pay for public schools, law enforcement, road maintenance and other community services.

The Board of Commerce and Industry, composed of unelected appointees, had sole authority to decide on ITEP applications and often rubber stamped every application it received with little scrutiny or concern for the communities affected by the loss in tax revenue.

During his first term as governor, Gov. John Bel Edwards issued executive orders to reform the program. He reduced the amount of the ITEP exemptions companies could receive to 80%, required the creation of jobs and — most significantly — gave local governments the authority to decide whether to approve or deny ITEP applications.

With Edwards leaving office in early January, lawmakers are under pressure from local governments and progressive advocates to codify the governor’s orders into state law. 

Although Allain’s proposal would reduce the amount of ITEP credits, it would take away local control. Local governments that have been denying ITEP applications for the past eight years would be forced to accept them and lose property tax revenue. 

Lobbyists from the Louisiana Municipal Association (LMA) and the Police Jury Association of Louisiana (PJAL) testified against Allain’s bill.

“It’s just not an even swap,” LMA Executive Counsel Karen White said. “It ends up with local governments losing millions and millions and millions of dollars in revenue even if 20% of money — that might otherwise be waived via ITEP — is enshrined somehow. It’s not a tenable situation.”

The House Ways & Means State Tax Structure Subcommittee recently studied the idea of repealing the inventory tax and found that it would likely cost businesses more because it would force parishes to increase their property tax millages.

“So it’s almost like you’re trading the devil you know for a much bigger devil that you don’t, but one that by all accounts is going to cost everybody more,” White said. “Businesses, residents, Joe Citizen alike — everybody’s going to pay more.”

PJAL Executive Director Guy Cormier agreed with White in that only a handful of parishes would benefit from the bill. He said PJAL passed a resolution at its most recent conference to oppose any legislation that would remove or limit the inventory tax.

Some lawmakers see the inventory tax and its respective credit as expensive cogs within an already complicated machine of business taxation in Louisiana. Budget watchdogs see the tax credit as a drain on state finances and a way for businesses to shift their tax burdens onto residents and homeowners. 

Allain said it is a counterweight to Louisiana’s rating with the Tax Foundation, a right-leaning think tank that compares and ranks states for having the lowest taxes.

“The problem is we get dinged for charging the inventory tax,” he said. “It lessens our rating, but they give us absolutely no credit for giving the money back.” 

Allain said he does not want to hurt local governments, but that local officials have yet to offer an alternative solution to fixing the inventory tax.

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