The Louisiana Legislature is considering several proposals to cut taxes or expand existing tax breaks during its current special session. All of these bills are aimed at businesses, and were filed based on recommendations from a task force consisting mostly of corporations and their lobbyists.
While it is understandable that legislators want to help those affected by the Covid-19 recession, these bills also come at a cost: They reduce the revenue that otherwise would be available to support our schools, rebuild our roads and bridges and make sure everyone has access to healthcare.
Below is an explanation and analysis of the major bills that could land on Gov. John Bel Edwards’ desk before the session ends on June 30:
What is it?: Louisiana businesses are allowed to keep a portion of the state sales taxes they collect to help offset the costs of collecting the tax – what’s commonly called “vendors’ compensation.” Current law allows businesses to keep .935% of their total state sales taxes up to a $1,500 monthly cap.
Analysis: Neither of these identical bills have an enormous cost to the state. The Legislative Fiscal Office estimates it would cost no more than $3.3 million a year. But these bills also would reverse one of the modest tax reforms that received broad bipartisan support as recently as 2013. Louisiana already has one of the most generous vendors’ compensation programs in the country (several states offer no such discounts), and there is no evidence that increasing the amount will lead to more retail activity.
Opportunity Zones / Angel Investor Tax Credits
What is it?: Federal law provides a tax break on profits from investments in designated Opportunity Zones, which include under-resourced and under-developed areas. The problem is that Opportunity Zones often include gentrifying areas and neighborhoods that are already affluent, and does not require that local residents benefit from investments in their community. Louisiana’s Angel Investor Tax Credit piggybacks on the federal law by allowing certain businesses to get a 25% tax credit on real estate investments in Opportunity Zones. The state program is capped at $3.6 million per year, which limits the cost to the state.
Legislation: Senate Bill 24 increases the amount of the Angel Investor Tax Credit from 25% to 35% for investments in new federal Opportunity Zones, and allows them to reap the credit in two years instead of the current three years. It doubles the cap to $7.2 million.
Analysis: The Opportunity Zone program was created by the 2017 federal tax law, and it’s still too early to tell if it’s going to actually benefit low-income neighborhoods or whether it includes too many loopholes that allow investors to get rich without helping the communities that truly need new investments. It is still fairly new, and enough time has not passed since the Tax Cuts and Jobs Act created the federal Opportunity Zone program to determine whether or not Opportunity Zones are a worthy program for states to expand. Therefore, we recommend that Senate Bill 24 be considered premature, and that the legislature wait until the program’s return on investment is clear before making any adjustments or expansions to Opportunity Zones.
Corporate franchise tax exemptions
What is it?: A corporate franchise tax is a tax on a company’s net worth. Currently in Louisiana, businesses pay $1.50 on each $1,000 of capital used in Louisiana up to $300,000, and $3 on each $1,000 above $300,000 of capital.
Legislation: Senate Bill 6 would suspend the corporate franchise tax on the first $300,000 of business capital for companies with a net worth under $1 million, and also would suspend an initial filing fee of $110. The suspension would last through June 2021 and would cost the state $7.5 million in lost revenue over the next two years.
Analysis: The bill is aimed at small businesses, and the vast majority of the financial impact would be in 2021 when Louisiana also has access to CARES Act aid. Most businesses would only save a couple hundred dollars. The revenue loss to the state would require corresponding cuts to the operating budget.
Quality Jobs program
What is it?: The Quality Jobs program gives cash rebates of up to 6% to businesses on their payroll costs for up to 10 years, along with other financial incentives for companies that provide jobs that pay at least $18 per hour plus benefits. The program is aimed at industries such as biotech, manufacturing, software development or clean energy.
Legislation: House Bill 19 would allow food service, bars, hotel and retail jobs to qualify for the subsidies. The Legislative Fiscal Office predicts it would result in at least a $16 million revenue loss to the state.
Analysis: The Quality Jobs program is meant to attract high-paying jobs to Louisiana. But the Legislative Auditor reported this year that the vast majority of jobs that are subsidized through the program would have come to Louisiana without the incentive. The program cost Louisiana nearly $100 million in the 2017-18 fiscal year, and provides Louisiana a very poor return on its investment ($0.10 for every $1 in incentives). The Legislature should be working to reform this program, not expand it.
Enterprise Zone expansion
What is it?: The Enterprise Zone program lets certain companies get state subsidies if they hire people who meet specific criteria such as being on public assistance, living in a designated enterprise zone, or are unemployable by traditional standards. Industries excluded from participating include retail, gaming, residential development, churches, employment agencies, and certain food and travel accommodation services.
Analysis: This bill would reverse reforms of the EZ program that received broad bipartisan support in 2013 and 2015. Retail and restaurant jobs are likely to return as social distancing requirements are lifted and the economy recovers. There is no evidence that more retail and restaurant jobs will return – or that jobs will return faster – if the state underwrites these jobs, which generally pay low wages.
“Carrybacks” and “carryforwards”
What is it?: A “carryback” allows corporations to apply a net operating loss from one year to a previous tax return, thus reducing their total tax liability. A carryforward lets corporations apply a previous net loss toward a future tax return. Louisiana currently only allows for carryforwards of up to 72% of taxable income. Carrybacks are not allowed in Louisiana, and only eight states allow them at all, of which four of those states have caps on the program.
Legislation: House Bill 25 and Senate Bill 22 would allow companies to carry back net operating losses from previous years, while SB 22 would also allow them to carry forward operating losses from 2017-2021. The Legislative Fiscal Office estimates that SB 22 could result in $151 million in revenue losses for the upcoming fiscal year.
Analysis: Allowing carrybacks at the state level would be extremely misguided fiscal policy, which is why the vast majority of states do not allow them. It would require the state to give refunds for taxes that were previously paid, which would reduce state revenues at the worst possible time. There is no guarantee that any refunds paid to businesses will recirculate in the state’s economy.
Before the Great Recession, 19 states allowed carrybacks. Since then, 11 of those states have rid themselves of the policy because it jeopardized their ability to raise necessary revenue in a time of crisis. While many businesses will see a net operating loss due to the economic impacts of COVID-19, it is important that Louisiana preserves every dollar available to ensure we can continue funding vital services that will help us rebound from the recession such as education and healthcare.
Expanding carryforwards is an equally bad idea. The federal CARES Act temporarily allows 100% of losses incurred in 2018 and 2019 to be deducted in tax years 2019 and/or 2020. But HB 25 and SB 22 propose to go much further, by retroactively allowing 100% of pre-2017 losses to be carried forward to tax years 2017 through 2021. The CARES Act has already expanded carryforwards by allowing companies to carry forward losses from both 2018 and 2019. To allow carryforwards from 2017 as well, as SB 22 proposes, would be an extreme expansion that surpasses federal relief and would cost the state additional money.
New Market Tax Credits
What is it?: New Market Tax Credits promise investments in under-resourced markets. In these programs, investment companies set up funds with the intention of investing in businesses from under-served, rural, or low-income areas. Businesses that loan money or invest in these funds receive refundable state tax credits (in essence, state tax dollars). The idea is that the economic activity generated by the investments in under-served areas will outweigh the cost of the credits to the state.
Legislation: Senate Bill 13 would allow for an additional $41 million of New Market Tax Credits on top of the $150 million that have already been claimed in Louisiana. The credits would be issued on Aug. 1, but could not be claimed against tax liabilities until 2023-24, at a cost to the state of $11.25 million per year for four years.
Analysis: Organizations from across the ideological spectrum – from the progressive Georgia Budget and Policy Institute to the conservative John Locke Foundation – have called these programs “schemes” or “gimmicks”, and for good reason. These credits are promoted around the country by three firms based in Louisiana: Advantage Capital Partners, Enhanced Capital, and Stonehenge Capital. States that have assessed the return on investment of their New Market Tax Credit programs have been overwhelmingly disappointed. Alabama and Missouri’s “rural jobs” programs showed that the states spent $92,000 and $146,000, respectively, in tax credits for every job created. An audit of New York’s 15-year program found that $400 million in tax credits produced a net 188 new jobs – costing the state $2 million per job. A review of Florida’s program found that the state received $0.18 in tax revenue for every dollar in tax credits. New Market Tax Credits are a bad idea in general, but to drain an additional $41 million from the state budget on a program that has failed in other states would be particularly short-sighted.
Expanding broadband access
What is it?: People in rural Louisiana and households of color are less likely to have high-speed internet access, which has become more important than ever during social distancing. Several bills have been filed to incentivize broadband expansion by exempting fiber-optic cables from sales tax and establishing income and franchise tax credits for broadband companies.
Legislation: House Bill 68 is an additional benefit for companies that are participating in the $20.4 billion federal Rural Digital Opportunity Fund, which subsidizes companies that expand broadband internet to underserved areas. The bill establishes a $500 tax credit against income or franchise taxes for each home or business that is served up to a cap of $50 million. House Bill 69 exempts fiber-optic cables from state and local sales tax when purchased by broadband companies.
Analysis: Broadband access is sorely needed in Louisiana. But the Rural Digital Opportunity Fund (RDOF) auctions are not even set to begin until October. The state should not provide any subsidies for broadband providers until we know how the federal program is working and whether additional incentives are needed.
The Covid-19 pandemic has knocked a $1 billion hole in Louisiana’s revenues for the 2020-21 budget year. Federal relief dollars are offsetting much of that shortfall, but these dollars are temporary and there is no guarantee that more assistance will be coming from Washington in the future. These are precarious financial times, and Louisiana should not be making its revenue shortfalls even worse by giving out new tax breaks without any evidence that they will grow the economy or create jobs. Instead of repeating the mistakes that drove Louisiana’s budget into the ditch after Hurricane Katrina, the Legislature should hit the pause button for now and return to the Capitol next spring prepared to do real tax reform.