Louisiana Business Tax Climate Still Rated Unfavorably

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Tax Foundation ranks the state 36th in nation

This week the Tax Foundation ranked Louisiana 36th in its annual State Business Tax Climate Index, down from 35th last year and 32nd in 2006. South Dakota took first place with the lightest tax burden, while New York came in last with the heaviest.

The Tax Foundation, a DC-based nonpartisan research group, rated states in terms of five tax categories: personal income, sales, corporate, property, and unemployment insurance. Kail Padgitt, the report’s author, then weighted each category in terms of the level of disparity between each state. For example, unemployment insurance, for which each state has a similar level of burden, contributed little weight, 11 percent of the index. Income taxes, which vary greatly across jurisdictions, contributed 30 percent towards a state’s score.

Louisiana’s placement, comfortably in the bottom half of the states, was primarily on account of its sales and income tax rates, for which it came in at 46th and 26th respectively. On the other hand, the state’s unemployment insurance had the state in 5th place. (The full report is here. Scroll down to page 10 for the category breakdown.)

“When you look at Louisiana’s overall scores,” says Padgitt, “we have seen a gradual decline in the state… A lot of the [explanation has] to be placed on the sales tax. Louisiana does very poorly on the sales tax… Even though your state rate is low, your local-option sales taxes are quite high.” These parish and city level taxes are bringing Louisiana’s ranking down.

While disparate sales taxes across different parishes would appear challenging to reform, Padgitt does believe there are viable reform options that would have “an immediate impact on the business climate.” He would repeal taxes on “business to business activities,” which he believes are more destructive to economic activity and business migration than retail sales taxes.

Alaska and then Wyoming rounded out the top three ranked states. They, along with most of the top ten, “have been able to do without one of the major taxes… But additionally, what these states also do well is that they tend to tax a broad range of services, and that allows them to tax at relatively low rates, so we get these low marginal tax rates.” (Click on the image or here for a larger version in a new tab.)

California and New Jersey followed closely behind New York, as the perennial heavy taxers. Now, under the weight of the latest recession and consequent declining tax revenues, they find themselves with increasingly difficult budget gaps.

“They have increasingly relied on these ‘millionaire taxes’… It leads to a bit of a boom and bust cycle within your state revenues… During the boom of the mid-2000s [California] really saw a lot of revenue coming in, and this led to a lot of extra spending… That revenue has ceased to exist; they’re now stuck with these huge budgetary problems because they’ve had a lot of extra spending and not a lot of revenue coming in.”

The rankings do not adhere to geographical or population density lines. While the less-populated Mountain and Mid-West states dominate the top ten, the more populous Florida and Delaware came in at 5th and 8th, and New Hampshire was 7th from the otherwise heavily taxed New England region.

Nor have there been major shifts of states up or down the rankings. “We haven’t seen one of the states adopt a major tax that hasn’t had it, or any states really get rid of a major tax.” Padgitt has only seen “more marginal changes.” For example, Massachusetts overtook Louisiana by changing its corporate income tax calculations – the way they handle “net operating losses,” that allowed businesses to smooth their profits and subsequent tax liabilities over time.

Click below to hear an exclusive interview with Kail Padgitt (19 minutes).

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Fergus Hodgson is the capitol bureau reporter with the Pelican Institute for Public Policy. He can be contacted at fhodgson@pelicaninstitute.org, and one can follow him on twitter.