A taxing dilemma
When the Metro Council recently was approached by the Holden administration with a change order to waive roughly $4.7 million in sales taxes on a $113 million sewer project, Councilman Chandler Loupe says he was bewildered.
"I'm like, 'What? Say that again?'" he says. "Because I know, as a municipality, that we're supposed to be exempt from paying sales taxes."
That might be true, but state law gives municipalities the option of including sales taxes on contracted projects or waiving them; East Baton Rouge Parish traditionally has opted to tax itself.
"If you do exempt a contractor from paying taxes, then obviously the bid is going to be lower in all likelihood," Assistant Attorney General Michael Vallan says. "On the flipside, if they're not paying taxes, then the city-parish, state, school board and any other entity relying on sales taxes won't get that money. But it's entirely up to the parish whether or not to do that."
Waiving sales taxes on a contracted project is as easy as designating the contractor as an agent of the city-parish and filling out some paperwork. Figuratively and politically, however, the process has several more obstacles to overcome.
John Carpenter, chief administrative officer in Mayor Kip Holden's office, says the city-parish has been debating the issue for the past decade—largely behind closed doors—but has been hesitant to disturb anticipated sales tax revenue for local entities and the state.
"It's not a decision you want to take lightly," Carpenter says. "But it has never been an issue where we sat around and said, 'We need to boost our own sales tax collections, so let's not do this.'"
If the city-parish waives sales taxes, it means taking away, on every dollar spent, 2 cents from its own general fund and the East Baton Rouge Public School System, one-half cent to the Green Light Plan and sewer projects, and four cents from the state.
Given Louisiana's $1.6 billion budget shortfall, Carpenter says, lessening anticipated revenue could be risky. "They have the ability to retaliate because we rely on some pretty significant state funds in our budget each year," he says.
No taxes have been waived on about $450 million worth of Green Light Plan road improvement projects through 2012. Carpenter says less than half that amount would have been subject to sales taxes, since about 50% to 70% of total project costs have been on labor.
The administration informed the council in late February that $250 million in bonds backed by anticipated revenue from the half-cent Green Light Plan tax are all but maxed out. Going forward, all projects will have to be pay-as-you-go; the money will have to be in city-parish coffers before they can be bid out and put under contract.
"How many more roads could we have done with our bond funds if we didn't charge all that sales tax on those projects?" Loupe says.
Choosing not to waive sales taxes on pay-as-you-go projects is one thing, Metro Council member Joel Boé says, but to pay sales taxes with bond funds that are financed with interest over the next 30 years is not fiscally responsible.
"What may be $10 million in sales taxes paid today could wind up costing $25 million by the time the bonds are paid off," he says. "Sure the state, city-parish and school system are benefiting in the short term, but it's at the expense of the Green Light Plan and SSO [sewer projects] bonds."
The council approved the change order presented by the administration in late January to waive taxes for the first time on a project included in the $1.3 billion federally mandated sewer system overhaul.
Should it decide to do the same on sewer projects through 2014, it would save $25.5 million, according to finance department estimates. But it would cost the state about $11.3 million in revenue, the city-parish and school system about $5.6 million each, and the Green Light Plan and sewer project about $1.4 million each.
Why now start waiving sales taxes on projects?
"After going through all of our analysis, we have decided on this particular project it just made more sense," Carpenter says, adding that sewer projects will be reviewed on a case-by-case basis to see if additional sales taxes will be waived.
He also says the school system has waived paying sales taxes on the recent construction of multiple schools. School system spokesman Chris Trahan confirms the system waives taxes on "all new construction and major renovations," but did not have an estimate on how much it's amounted to in recent years.
And Boé says he's not 100% sold on the administration's explanation for why it's just beginning to look at waiving taxes on sewer projects.
"If you don't want to do it on road projects, then why would you do it on sewer projects?" he says. "It's probably just because they're so overbudget on the sewer projects. "
Loupe says he's talked to contractors who tell him that many parishes outside of East Baton Rouge routinely waive sales taxes for municipal projects. Carpenter says city-parish bond attorney Richard Leibowitz has told him it's done "very, very rarely."
New Orleans, for example, does not waive sales taxes on any of its road projects, spokeswoman Nicole Lacey says. A spokesman for the New Orleans sewer and water board did not return a request for comment.
After conducting additional research on municipal bid law, Loupe hopes to bring an ordinance to the Metro Council in the coming weeks requiring the city-parish to waive sales taxes on future sewer and Green Light Plan projects. Boé says he'd likely support the measure, adding he wants the council and administration to have a more lengthy discussion about the pros and cons.
The issue has only come before the council twice since 10 of 12 members took office in early 2009; Boé says he was unaware sales taxes have been paid on municipal work.
"Unless there's an elephant in the room that I'm not seeing, I don't see why we wouldn't support" Loupe's ordinance, he says. "Maybe there is a good reason we're charging ourselves sales taxes, but right now I just don't see it."
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