The Legislature’s current session is supposed to be focused mainly on tax and budget issues. But after a tumultuous 2018, marked by three special sessions devoted to filling a budget shortfall, there appears to be little appetite for making major structural changes to state tax policy. That’s a shame. While Louisiana no longer faces the massive structural deficits of recent years, we still are not raising enough revenue to adequately provide the educational opportunities, infrastructure and strong safety net that Louisiana families need.
Worse, Louisiana’s over-reliance on sales taxes to fund state government means the poorest households continue to pay a higher percentage of their income in taxes than the wealthiest.
But that doesn’t mean the session can’t be productive. There are several steps – large and small – that policymakers can take in the next few weeks to make Louisiana’s tax structure more fair, efficient, robust and stable.
Sales tax exemption for basic necessities: Louisianans pay some of the highest combined (state and local) sales taxes in the country. Sales taxes are regressive, meaning they take a higher percentage of income from poor people than the wealthy. To make the state’s 4.45% sales tax more fair, Louisiana exempts certain items deemed necessities, such as groceries, medication, and utilities. Unfortunately, feminine hygiene products, diapers, and college textbooks never made the cut and are taxed as luxury items.
Diapers and feminine hygiene products are every bit as much a necessity as groceries and prescription drugs. Disposable diapers can cost up to $80 a month per child, and one-third of American families struggle to provide them for their children. In Louisiana, where we have no minimum wage, a single mother of two small kids would spend 13 percent of her pre-tax income on diapers alone.
Several states have increasingly tackled the issue of the “tampon tax” with Nevada becoming the tenth state to exempt feminine products from state sales tax as of November 2018. Louisiana could lead the South in exempting tampons and diapers from the state sales tax by passing Sen. J.P. Morrell’s Senate Bill 5, which would exempt feminine hygiene products and diapers from the state sales tax.
The bill cleared the Senate on May 8, but a companion bill that would have added the exemption to the state constitution fell five votes short of a two-thirds supermajority.
College Textbooks The cost of a college education has spiraled in Louisiana over the past decade, as tuition has replaced state support as the main financing source for public colleges and universities. While scholarships such as TOPS cover tuition for some families, nearly all college students have to pay for college textbooks, with the average student spending $484 per academic year.
Nineteen states currently help students by exempting textbooks from state sales tax. Louisiana can join them by approving Senate Bill 85 by Sen. Regina Barrow.
Streamline sales tax collections: In 2018 the U.S. Supreme Court ruled that states can collect sales taxes on online purchases, even if that retailer does not have a physical presence in the state. But Louisiana’s ability to collect these taxes is hampered by a uniquely cumbersome sales tax collections system that critics describe as “duplicative, outdated, inconsistent and inefficient.” While most states collect all sales taxes at the state level, Louisiana collects only the state portion and leaves it to 370 local taxing authorities to collect taxes at the local level. This convoluted collection process is particularly hard for small businesses operating in multiple parishes.
Local municipalities have long opposed the centralization of sales tax collections, but if Louisiana wants to keep up with the shift to internet-based economies and retail, we must streamline sales tax collections. House bill 57 by Rep. Tanner Magee, which awaits its first hearing, would create a centralized tax collection system for sales taxes and put Louisiana in line with the vast majority of other states.
Implement a state Child Tax Credit: The Child Tax Credit (CTC) was created in 1997 to help families afford the many expenses that come with raising kids. The vast majority of families in the United States qualify for the credit, which allows for a $2,000-per-child federal tax reduction. In recent years, states have developed matching credits to the federal credit, much like the Earned Income Tax Credit.
Louisiana has the highest child poverty rate in the nation, with 28 percent of kids living below the federal poverty line. We also have the highest extreme poverty rate, with 14 percent of kids growing up below 50 percent of the poverty line. This means a Louisiana-specific child tax credit could have a huge impact on families struggling to make ends meet.
To make the greatest impact with the fewest dollars, Louisiana could follow Colorado’s Child Tax Credit, which is only available to families with children under 6. Offering a state-level tax credit for low- to moderate-income parents of young children would have multiple benefits:
- The extra income boost could help a family afford having a parent stay at home, or if both parents want to participate in the workforce a tax credit could help cover the cost of child care.
- In Louisiana, 31 percent of children under 5 live in poverty. But the poverty rate drops to 26 percent for children ages 6 to 17 years old, partially because they are enrolled in public school instead of a costly childcare program. A tax credit targeted at young children could address this disparity.
- State child tax credits can bring families above the poverty line, which can have long-term, positive dividends for children and state economies. Children whose families receive the Child Tax Credit, the Earned Income Tax Credit, or both, do better in school, are more likely to enroll in college, and will have higher income earnings as adults.
Eliminate the federal income tax deduction: Louisiana is one of only three states – Alabama and Iowa are the others – that allows the ability to deduct all federal income tax payments on state returns. This tax break costs Louisiana more than $900 million in revenue each year, and one-third of the benefits flow to the richest 1 percent of income earners.
Economists on the left, right and center agree that this is bad policy, because it makes Louisiana’s individual income tax collections vulnerable to changes at the federal level. For example, the 2017 Tax Cuts and Jobs Act reduced federal income taxes of many wealthy individuals. This meant they had less money to deduct on their state returns, which resulted in more revenue for Louisiana. But the opposite could easily happen if the wealthy are taxed at a higher rate on their federal taxes in upcoming years, which would result in an unexpected revenue hole for Louisiana.
Create a new “millionaire” income-tax bracket: A Louisiana family that makes $10,000 per year will pay state and local taxes at nearly twice the rate of a family that makes $1 million. To help even the playing field, states around the country have proposed a new tax bracket on incomes above $1 million as a way of raising revenue for important programs. While critics of millionaire’s tax brackets claim they drive out wealthy residents who create jobs and make investments, research has thoroughly debunked this “flight myth”.
According to the Institute on Taxation and Economic Policy (ITEP), a modest millionaire’s bracket could raise significant revenue for Louisiana, while only impacting a fraction of a percent of taxpayers. A 2016 study by ITEP shows that instating a top bracket of 8 percent on income over $1 million could raise $40 million per year. This money could allow Louisiana to invest in underfunded programs such as early childhood education, need-based college scholarships or child welfare programs.
- By Neva Butkus