To the Members of the Louisiana State Legislature,
Jean-Baptiste Colbert, Finance Minister of France under King Louis XIV, famously said, “The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing." As you return for the Special Session, you are facing a very serious budget crunch, but the plan put forward by Governor John Bel Edwards would rightfully result in much hissing among taxpayers. On behalf of National Taxpayers Union’s (NTU) Louisiana members, I strongly encourage you to reject these massive tax hikes.
While the details of how the Pelican State arrived in this precarious position are nuanced, including the dramatic decline in oil prices, the Governor’s plan would take Louisiana backwards.
The plan put forward by Governor Edwards calls for a one percentage point increase in the sales tax from four percent currently to five percent. This amounts to a 25 percent increase. In addition, the plan broadens the sales tax base by applying it to a number of items not currently subject to the tax. The only exemptions proposed by the Governor are those that are mandated under the Louisiana Constitution, such as groceries, prescriptions and utilities. A 2015 study by Tulane and Louisiana State University economists recommended against raising the state sales tax, given that when combined with sales taxes levied at the local level, Louisianans are paying close to 9 percent on average – the third highest in the country. Given their regressive nature, the proposed sales tax hike would hit particularly hard those who can least afford to pay more to government. Governor Edwards has suggested this tax will be “temporary”, but taxpayers should be exceedingly skeptical of this claim; more often than not, temporary tax measures become permanent.
Another major component of Governor Edwards’ plan is to increase the taxes paid by telephone – landline and wireless – users. The plan would permanently raise the tax from two (interstate) or three (intrastate) percent to a flat five percent state levy monthly. Like the sales tax, telecommunications taxes are regressive. As a recent study by the non-partisan Tax Foundation found, Pelican State residents pay an average of 13.75 percent in wireless taxes when considering federal, state and local levies. Increasing the tax by even a couple percentage points could have significant consequences for Louisianans struggling to stay connected in an increasingly wired society.
Less than a year after Louisiana dramatically hiked its tobacco taxes, Governor Edwards is at it again – this time proposing an increase from $.86 cents per pack of cigarettes to $1.08 per pack. Thankfully the Governor’s plan would spare e-cigarettes from an additional levy. Simply put, increased cigarette taxes are an ill-conceived way to fund government.
For starters, cigarette taxes, like sales taxes and telephone taxes, are highly regressive, affecting low-income earners far more than high-income earners. It is estimated that over half of adult smokers make less than 200 percent of the Federal Poverty Level. In other words, the tax hikes under consideration would hit particularly hard those Louisianans who can least afford to pay for them.
In addition, if Louisiana increases its cigarette taxes by $.20 per pack, its neighbor to the East – Mississippi – would have a levy that is 40 cent less per pack. This would create even stronger incentive for black market purchases or for cross-border sales of tobacco products from the neighboring state.
Finally, and perhaps most importantly, cigarette taxes usually yield far less revenue than initially projected; as the non-partisan National Conference of State Legislatures succinctly noted, “cigarette taxes are not a stable source of revenue.” A 2013 study by the National Taxpayers Union Foundation found that revenue projections were met in only 29 of 101 cases where cigarette and tobacco taxes were raised between 2001 and 2011. That same study concluded that over the same period, tobacco tax hikes were followed by other tax hikes nearly 70 percent of the time, usually after revenues failed to meet initial rosy projections.
Governor Edwards has also included an increase in the tax levied on alcohol at the wholesale level to the regional averages. He has not specified exactly what rate he is proposing on alcohol, but has implied that he would look to the 2014 House tax study as a rough guide. A recent story in the Times-Picayune estimates this would result in tax increases on liquor “from $2.50 per gallon to $5.50 per gallon and the wine tax from 11 cents per gallon to 45 cents per gallon.” At its current rate, it is estimated that taxes on wine and spirits in Louisiana increase the cost of these items by nearly 21 percent at the retail level.
Though NTU has long opposed the archaic three tier distribution system, it is highly unlikely the Pelican State would change its structure during the upcoming session. In light of this, the tax at the wholesale level would likely be passed along to consumers by way of higher prices at the retail level. This would be yet another regressive tax increase.
Internet Sales Taxes
The Governor also proposed more aggressive attempts to collect sales taxes on goods purchased via the Internet. Although his proposal lacks detail, it should be highly concerning to legislators. In 1992, the U.S. Supreme Court issued its decision in Quill Corp v. North Dakota, which held that states cannot require remote sellers to collect sales taxes unless the seller has a physical presence in the state. In legal parlance, this physical presence requirement is known as “nexus.” The Supreme Court noted that Congress could change this requirement at any time. To date, however, Congress has refused to allow states to tax remote sellers outside their jurisdiction.
Likewise, HB 6 and HB 30, which were filed for the Special Session, attempt an end run around the Supreme Court’s Quill decision by expanding the number of activities that create “nexus.” If enacted, legislation such as HB 6 and HB 30 would immediately trigger a costly legal challenge.
Supporters of these bills rest their case on two faulty premises. First, proponents suggest that the status quo is unfair to brick and mortar retailers in Louisiana which are required to charge, collect and remit state and local sales taxes. That is debatable, but it obscures the reality of HB 6 and HB 30, which target only a tiny subset of online transactions. If proponents of this bill want states to be able to tax all online sales, federal action is necessary.
Next, proponents argue these bills will be a cash cow for state government. This is false. After various states passed “affiliate nexus” laws, companies like Amazon terminated their associate programs in many of these states. In 2011, for instance, Illinois passed a similar law to the one under consideration in Louisiana. As a result, it was estimated that 6,000 companies – two-thirds of Illinois’ affiliates – went out of business or moved to another state. This meant fewer jobs and less income in Illinois.
Serious legislators in the Pelican State will avoid constitutionally dubious fiscal gimmickry like affiliate nexus statutes.
There is no question Louisiana is facing a serious budget challenge, but the Governor’s short term proposals for Fiscal Year 2016 are irresponsible. They would amount to the largest tax hike in Louisiana’s history. Accordingly, NTU strongly urges you to put taxpayers first by rejecting these ill-conceived plans.
Sincerely,Clark PackardPolicy and Government Affairs Manager