“The CAT proposal is not fiscal reform. It’s a complex departure from the HCR 11 Task Force and a convoluted approach to raising $900 million more in taxes from Louisiana entrepreneurs and businesses that are already struggling through a recession and natural disasters,” stated LABI president and CEO, Stephen Waguespack. “State economists repeatedly note that the government will continue to run deficits until more people are working again in Louisiana. The CAT proposal, despite these latest attempts to improve it, ignores the reality facing employers and families alike.”
Roughly one month ago, Governor Edwards introduced a rough outline of a completely new tax proposal known as the CAT, which had not been vetted by the Blue Ribbon Task Force nor debated in legislative committees in recent years. Governor Edwards had yet to specify the details of the plan or introduce the bill until the second week of an eight-week legislative session. The Governor’s legislation was finally shared with the public late this afternoon.
Upon reviewing the bill, LABI’s initial concerns remain valid and numerous. The CAT is generally referred to as a Gross Receipts Tax – a tax on the gross revenue of a company regardless of profitability. Gross receipts taxes are often compared to an expanded sales tax, which applies not only to the final sale but to all transactions including intermediate business-to-business purchases of supplies, raw materials, services and equipment.
Gross Receipts Taxes are panned nationwide by expert groups as varied as the Council on State Taxation (COST), the Institute on Taxation and Economic Policy (ITEP), and the Tax Foundation. According to tax experts and economists, the Commercial Activity Tax violates essential policy principles such as transparency, fairness and competitiveness.
LABI expressed the following major concerns with Governor Edwards’ CAT legislation:
- This policy taxes the first dollar of receipts or revenue without regard to profitability or ability to pay.
- It is a tax on business inputs, which leads to increased costs of production because it is applied multiple times on the final product and is hidden from the consumer in the price of goods and services due to “pyramiding”. As a result, the CAT is actually a tax that is wider than the economy itself. Similar to a sales tax, it is regressive, requiring disproportionately more from low-income consumers.
- Double taxation is an absolute outcome against businesses organized as pass-through entities, such as LLCs or sole proprietorships, whose profits also remain subject to the individual income tax above and beyond the receipts taxed by the CAT.
- Effective tax rates may vary by industry sector and individual business types. Businesses engaged in high-volume, low-profit sectors are adversely affected, as are start-up companies that generally lose money in the initial years of operation.
- Companies with longer production chains are exposed to a higher tax burden. It encourages vertical integration, so that large companies minimize external transactions and decrease their purchase of materials or services from smaller companies.
Louisiana’s poor economic performance is the driving factor behind the state’s deficit – a fact the Governor’s proposal still overlooks. Waguespack concludes: “LABI urges the Legislature and the administration to consider a holistic approach to addressing the deficit that gets the economy back on track, addresses structural problems in the budget itself, seeks to rein in expensive programs, and truly reforms the tax code. A CAT will simply dig a deeper hole in Louisiana’s economy and lead us right back where we started.”
Last week, LABI released a policy memo outlining all of the ways that Louisiana business is already paying billions of dollars in taxes to support state and local government. Furthermore, LABI has released an in-depth analysis of the state’s budget challenges in the three-part Budget Basics research series, which includes a series of recommendations for budget reform.