by David Gray
A new report by the Tax Foundation warns that high state sales taxes can lead to reduced consumer spending and fewer businesses. That’s bad news for Louisiana, where the combined state and local sales tax rate is the third highest in the nation, trailing only Tennessee and Arizona. If Louisiana raises its state sales tax to 5.78 percent, as the administration is suggesting to legislators, Pelican State consumers would pay the nation’s highest overall sales taxes on everything from basics like clothes and appliances to restaurant meals and concert tickets.
The report should serve as a warning to policymakers as they consider a risky economic experiment that would trade state income and corporate franchise taxes for the highest consumption taxes in the country.
The Tax Foundation ranks states according to their combined sales taxes because “a state with a moderate statewide sales tax rate could actually have a very high combined state-local rate compared to other states.” Louisiana appears to fit that definition perfectly. The state’s 4 percent statewide sales tax is one of the lowest in the nation. But local sales taxes are the highest in the nation – partly due to Louisiana’s generous homestead exemption. Since the exemption keeps the first $75,000 of a home’s value from being taxed, local taxing jurisdictions cannot fully use of property taxes to finance schools, parks, fire protection, etc. This is a stark departure from local jurisdictions in other states, such as Texas, that levy high property taxes to fund local services.
As the Tax Foundation notes, sales tax rates can be a factor in where businesses locate, and can influence consumer behavior as buyers flock to low-tax areas. In Louisiana, that could mean some New Orleans-area residents opting to shop at outlet malls in the nearby Mississippi Gulf Coast, since Mississippi’s sales taxes would be substantially lower than Louisiana’s, or Shreveport-area residents flocking to Arkansas or Texas for major purchases. The report also notes, “businesses sometimes locate just outside the borders of high sales tax states to avoid being subjected to their rates.”
When this occurs, states with lower sales tax rates may benefit from increased sales tax revenues, increased business tax revenues and more employment.
As the chart below shows, Louisiana’s current combined sales tax rate already is higher than all of its neighboring states, though not by a wide enough margin to entice most consumers to cross state lines in search of a bargain. But tacking an additional 1.78 percentage points to the state sales tax – and extending that tax to services that are not currently taxed – could reduce spending in Louisiana stores and cause some businesses to either close or relocate to lower-tax states.
