On a snowy January morning inside Washington D.C.’s historic Willard Hotel, dozens of the state’s top business leaders gathered for a briefing from Gov. John Bel Edwards. Some in the room, mostly CEOs and members of the Committee of 100 of Louisiana—the influential business roundtable—were concerned about the approaching blizzard that threatened to disrupt the Washington Mardi Gras festivities that had brought them all to the nation’s capital in the first place. Some were worried about catching a flight home while they still could.
But most were focused on a more serious pending crisis—the state’s budget situation. As he had in other recent speeches, Edwards told the group about the $750 million hole in the current fiscal year’s budget and the $1.9 billion deficit projected for next year. He outlined his administration’s plan to deal with the crisis in the upcoming legislative session: a series of some cuts and lots of tax increases that would hit business hard. He also asked for their support.
It’s not the message anyone in the room particularly wanted to hear, but when the governor finished his speech, the group gave him a standing ovation.
“It’s partly because of the stature of his office, but I think they genuinely appreciated his brutal honesty and they recognize we have to do something,” says C100 President Michael Olivier, who organized the event. “He was refreshingly blunt and honest, and I think that set the tone in terms of the reality of what we’re dealing with … and it reinforced the need to work together.”
There has been a lot of talk about the need to work together during the upcoming special session, in which lawmakers will have just three weeks to fill the current year’s budget hole and pass any tax increases to help close next year’s gap. But there’s a difference between talk and action, and not everyone in the state’s business community is as receptive to the governor’s proposal as are the leaders of C100. Reaction to the plan from other business organizations has ranged from disappointment to disgust because of its heavy emphasis on tax increases.
“This is tilted towards business-related proposals,” says Baton Rouge Area Chamber President and CEO Adam Knapp. “It’s death by a thousand cuts to business.”
“This is not a menu of options,” says Stephen Waguespack, president of the Louisiana Association of Business and Industry. “It is one main dish and it is all taxes.”
“We pretty much have a problem with all of it,” says Dawn Starns, president of the National Federation of Independent Businesses.
To suggest there is a division within the business community over how far—if at all—they’re willing to compromise on the issue of tax increases is, perhaps, an overstatement. It’s certainly not a popular thesis to float. No one wants to publicly disagree.
But there are clearly differences of opinion within the organized business community. Some are pragmatic, reasoning that if business can coalesce behind the revenue measures that hurt them least, they’re likely to fare better than opposing everything and getting hammered, which is what happened last year.
Others are standing firm against tax increases, arguing they will endanger the state’s economy and harm its competitiveness with other states.
The extent to which they come together and come up with their own offensive strategy in the session will go a long way toward determining how business ultimately fares because here’s the thing: Tax increases are coming. It’s just a matter of which ones and how many.
When lawmakers convene in the special session, the immediate task at hand will be to close the $750 million gap in the current fiscal year’s budget. To do that, Edwards has proposed using two sources of one-time money—$128 million from the state’s Rainy Day Fund and $200 million from BP settlement money that was to be used for economic damages to the state.
The plan also calls for a 10% cut to the nearly $1.7 billion worth of statutory dedications on the books, a move estimated to save some $160 million.
Additionally, Edwards is proposing a temporary, one-cent sales tax increase, which will bring the state’s sales tax from 4 cents to 5 cents and raise an estimated $216 million by June 30.
“We’ve got to do something and we’ve got to do something quickly,” says Commissioner of Administration Jay Dardenne. “This budget is in crisis mode.”
Crisis or not, already some are raising questions about the legality of using the BP money. Others have problems with the penny sales tax. Though it spreads the tax burden around, it’s regressive and particularly onerous on small business, according to Starns.
“Merchants and retailers, the mom-and-pop operations would really feel it,” she says. “Think about the restaurant or coffee shop owner who goes to the store every morning to buy food for that night. That’s just one small example but you can see how the impact would be huge.”
Rep. Franklin Foil, R-B.R., predicts the fight over the penny sales tax, whether temporary or not, will be one of the toughest sells of the session.
Still, because the situation with the current fiscal year is so dire and the amount of time in the special session so short, between the use of one-time money, the cuts to dedications and some sort of tax increase, lawmakers will cobble together some sort of solution to get the state through the end of June. They really have no choice.
Whether they’ll also be able to tackle the $1.9 billion shortfall projected for FY 2017 in that three-week span is a different story altogether. Because this year’s regular session, which begins March 14, is a nonfiscal session, lawmakers must pass any tax increases—whether to solve the 2016 crisis or the 2017 one— during the special session in February.
That will be a tall order, not only because of the controversial nature of tax increases but because House members are already behind the eight ball. As of late January, the House of Representatives—where all tax bills must originate— still didn’t have its committee leadership in place, any legislation pre-filed or even a schedule of hearings.
“It’s going to be very difficult to get everything solved in three weeks,” Foil says. “I would not be surprised if we have to come back after our regular session to have another special session. We’re just not ready to take on all that heavy lifting.”
Whether the heavy lifting comes in the special session this month or at a later one in the summer, the big fights will center on several key tax measures proposed by the governor earlier this month, all of which fall on the shoulders of business.
One of the biggest fights will be over a proposed repeal of the business utilities sales tax exemption. For year, businesses—like residential customers—were exempt from the four-cent tax, which remained on the books even though no one paid it. Last year, the Legislature reinstated a one-cent tax on business. The new administration is going for all four.
“I thought they’d go after another one or two cents,” says Robert Travis Scott, president of the Public Affairs Research Council. “But not all four. That’s the biggest surprise of this whole package. No one saw this coming.”
Another battle is expected over a proposal to suspend the inventory tax credit refund for the current fiscal year, and cap the credit and the refund at a lower rate beginning in the next fiscal year.
The inventory tax, which businesses pay on unsold inventory at the end of the year to local government, is widely considered to be antiquated and anticompetitive. That’s why the Legislature in the 1990s created a credit that rebates to businesses 100% of their taxes paid, either in the form of a cash refund or as an offset against their corporate income and franchise tax liabilities.
Last year, the Legislature lowered the refundable amount businesses can claim to 75%. This year’s proposal would also lower the offset amount—to 80%. What’s more, it would further lower the refundable portion to 75% of 80%, or 60% of the total tax bill.
“This is a real concern with respect to the state’s competitiveness,” Knapp says. “It’s an unconventional tax that should have been eliminated 20 years ago. Now they’re proposing to increase it without actually dealing with the underlying issue.”
Still another red flag many in the business community see in the governor’s plan is a proposed suspension of the deduction businesses can claim on their corporate income taxes when they have a net operating loss. Companies can currently claim up to 72% of their NOL as a deduction. This measure would suspend that for the current fiscal year and permanently cap it at 50% beginning next year.
“If the state comes in and taxes debt you’re talking about a game changer that will drive business out of this state,” Waguespack says. “Especially at a time when so many companies are experiencing losses due to low oil prices, this will be huge.”
Two other proposals expected to generate controversy among businesses would extend the corporate franchise tax to LLCs and remove the 2019 sunset provision on several measures enacted last year reducing business tax credits. Both measures are considered bad for the economy and worse for the state’s reputation as a place to do business.
“The issues that directly harm Louisiana’s economic competitiveness we absolutely stand against,” Knapp says. “That includes the proposals to make permanent the reductions in key incentive programs that Louisiana has used to attract companies to the area. We see those as nonstarters.”
‘A LOUISIANA THING’
As troubling as what’s on the table is what is not, according to Knapp. Topping the list of priorities of business leaders in the Capital Region is the need to address transportation and infrastructure. It doesn’t make sense, Knapp says, that the administration is asking for more money all from new taxes but isn’t offering anything in return.
“If you’re asking legislators from Baton Rouge to bleed on tax increase, why don’t they offer something the community has identified as a priority?” he says.
Everyone agrees infrastructure is a key priority, but Olivier at C100 advocates for a more conciliatory approach toward the governor’s plan, one that recognizes the unpopular measures that must be taken in the short term in order to get the state on a sound financial footing. In the long run that will—in theory, at least—enable the state to enact the kind of fiscal reform for which C100 and other groups like the Tax Foundation, PAR and the Council for a Better Louisiana have been advocating.
“We’ve got a huge mess we’ve created that’s been going on for years,” he says. “It’s not a Republican or Democrat thing. It’s a Louisiana thing. I think business people get that and a prepared.”
Still, it’s hard to say how far they’re willing to go. Turner Industries Chairman and CEO Roland Toups says he agrees with the balanced approach and is willing to do his part. He says he’s a Louisianian first.
“I think most business people get that and feel that way,” he says.
But he is dismayed that so much emphasis right out the gate is on raising revenues instead of cutting spending.
“We continue to spend, spend spend,” he says. “We have a Revenue Estimating Conference. Why don’t we have an expenditure estimating conference? Why don’t we do zero-based budgeting? I’m not sure we need to continue funding everything we fund. We have to get away from the tax and spend mentality.”
It’s a discussion lawmakers will be having in the next few weeks and beyond, as a new administration tries to tackle an old fiscal crisis that continues to worsen and has so far proven elusive to solve.
“It’s going to be a lot,” Starns predicts. “Particularly with so many new lawmakers trying to digest this—they’re going to be drinking water from a fire hose. It’s going to be a difficult session for everyone.”