Standing on the edge of a $1.3 billion fiscal cliff, Governor John Bel Edwards (D‑La.) announced his 2017 Budget Stabilization Plan, which he intends to pursue during the 2017 Regular Session of the Louisiana Legislature beginning on April 10, 2017. The Plan notes that Louisiana is operating under a broken, outdated system, “that just simply does not work for Louisiana any longer.”
The Governor’s Plan includes the following tax-related highlights:
Individual income tax proposals –
- Eliminate the federal income deduction
- Lower tax rates to 1%, 3% and 5%
Sales tax proposals –
- Let the “temporary” 1% state sales tax rate sunset as planned on July 1, 2018 (- $880M)
- Permanently repeal numerous exclusions and exemptions otherwise applicable to the remaining 4% state sales tax rate (+ $180M)
- Expand sales tax to certain services beginning on 10/1/17 (+ $200M)
Corporate tax proposals –
- Retain corporate income tax, but eliminate the federal income tax deduction and lower corporate income rates to 3%, 5% and 7% (+ $66M)
- Implement a Commercial Activity Tax (CAT) based on gross receipts for all entities doing business in Louisiana (+ $800M – $900M)
- Corporations would pay greater of the corporate income tax or the CAT
- Entity with less than $1.5M in gross receipts would pay a minimum CAT of $250 – $750
- CAT rate would be .35% for any entity with more than $1.5M gross receipts
- Phase out corporate franchise tax over ten years
Tax expenditure proposals –
- Make permanent the 28% reductions to income/franchise tax credits, exemptions, rebates and deductions (+ $192.5M)
- Sunset or eliminate certain credits and incentives
The Proposed Louisiana CAT:
As anticipated, the Plan includes a proposal to implement a CAT in Louisiana to both raise revenue and replace Louisiana’s franchise tax. However, as is always the case, the “devil” is in the details. Based on the summary Plan, the Louisiana CAT would apply to partnerships, limited liability companies, limited liability partnerships, regular C corporations, S corporations, joint ventures, and disregarded entities. Entities that would be exempt from the CAT include non‑profit organizations, governmental entities, certain public utilities, certain financial institutions, certain insurance companies, and business with $1.5M or less of taxable gross receipts. The proposed tax rate for the Louisiana CAT is 0.35%.
Most receipts generated in the ordinary course of business and attributable to sales of goods or services sourced to Louisiana would be included in the CAT calculation. Deductions for gross receipts would be limited to cash discounts allowed and taken and returns and allowances. Gross receipts would be apportioned to Louisiana using a single-sales factor and market-based sourcing. Rents and royalties from real property located in Louisiana would be sourced to Louisiana. Gross receipts from sales of tangible personal property would be sourced to Louisiana if the purchaser receives the property in Louisiana, and gross receipts from sales of services would be sourced to Louisiana if the purchaser or recipient of the service receives the benefit in Louisiana.
For corporations and other disregarded or pass-through entities that have elected to be taxed as corporations for federal income tax purposes, the Louisiana CAT would serve as an alternative minimum tax to the Louisiana corporate income tax.
At this point, it is difficult to evaluate the implications of the governor’s proposals. The Jones Walker SALT Team will continue to follow legislative developments related to the governor’s Plan and report on them throughout the upcoming 2017 Regular Session.
The CAT is out of the bag; now businesses will have to determine whether they are allergic to, or can live with, the CAT.