Recently I had the opportunity to speak at the Louisiana Association of Tax Administrators conference, and I was able to share with them some key economic indicators and information about how Louisiana’s tax structure impacts business in general and offer some examples of its impact to specific industries.
In recent years, state lawmakers have made considerable strides in improving Louisiana’s business climate and the perception of how we do business in the state. We see evidence of these changes as reports regularly come from the governor’s office and Louisiana Economic Development about new and expanding businesses from all corners of the state. Locally, we’ve also had our share of business development news in the past couple of years — both the attraction of new businesses and the expansion of existing ones. It’s no secret that the business climate in Lafayette is pro-growth and entrepreneur friendly. The business community has been very successful in creating and sustaining businesses that offer any imaginable product or service. But what else needs to be done so out-of-state entrepreneurs and corporations continue to consider Louisiana cities for their expansion projects?
As an economic developer, I understand that Lafayette cannot and does not operate in a vacuum. We’re a part of the whole of Louisiana, and with that we’ve often had to cope with unfavorable obstacles whether legitimate or perceived. Lafayette’s competitive advantage lies not only within the parish lines, but within the state boundaries. Historically, one of the biggest burdens for Louisiana is the business tax system. Taxes matter to business, and those states with the most competitive tax systems will reap the benefits of being seen as business-friendly.
In doing research for my presentation to the Tax Administrators, we reviewed two reports from The Tax Foundation, a nonpartisan tax research group based in Washington, D.C., that measures the impact of a state’s business taxes in two different ways — comparing each state to an “ideal” tax system and comparing actual tax burdens state-to-state.
Annually, the Tax Foundation compiles the State Business Tax Climate Index as a tool to measure the ease and impartiality of a state’s tax system. The index measures five types of taxes — corporate, individual income, sales, unemployment insurance, and property — on a weighted scale. Each component is ranked on a scale of 0 to 10. Louisiana’s average score on the 2012 index is 4.93 and overall ranks 32nd. While Louisiana is in the middle of the pack nationally, these scores still leave room for much improvement regionally. Southern states have traditionally led the charge in pro-business tax environments, hovering around or above the top 15 in the index. Louisiana’s index ranking of 32nd places it second to last among its Gulf South peers (see Chart 1).
|While Louisiana is in the middle of the pack nationally, these scores leave room for much improvement regionally. Research shows that states with the best tax systems will be the most competitive in attracting new businesses and most effective at generating economic and employment growth.
Louisiana’s Sales Tax rank of 49 out of 50 brought down its overall score. Louisiana has the highest average local option sales tax in the country at 4.84%.
Source: Tax Foundation, 2012 State Business Tax Climate Index
The report’s authors reiterate something I’ve written in this column before. Instead of offering incentives or other programs to offset unbalanced corporate taxes, “a far more effective approach is to systematically improve the business tax climate for the long term so as to improve the state’s competitiveness.” In other words, the only fair incentive is a fair tax structure across the board — statewide, nationally, and on a broader scale, globally.
Where the State Business Tax Climate Index measures state tax codes relative to an “ideal” tax structure, Location Matters: A Comparative Analysis of State Tax Costs on Business is an apples-to-apples comparison of actual corporate tax costs incurred in each state. Economists designed seven model firms and calculated each firm’s tax bill in each state and subsequently ranked the states one to 50.
This study examines tax competitiveness in four ways: the total effective tax rate (corporate net income taxes, capital taxes, unemployment taxes, sales taxes, property taxes, gross receipts taxes and other general business taxes), the impact of incentives (measuring how much each state’s incentive programs impact a business’ tax burden), ranking average tax costs from lowest to highest, and measuring tax burdens based on industry and age of firms.
How does Louisiana stack up against the rest of the nation in this report? For mature firms that have been in business 10 or more years, Louisiana ranks 10th overall; and for new firms, in business less than three years, Louisiana ranks 2nd overall (see Chart 2). Louisiana’s aggressive incentive package benefited our ranking, especially the overall rank for mature firms, which was buoyed by a first place rank for mature Research and Development firms. While the R&D incentive is strong, there are very few R&D firms in the state, leaving the incentive underutilized and the full potential to the state unrealized. On the opposite side, the overall rank for new firms was brought down (albeit slightly) by high property, equipment and inventory taxes imposed on call center and distribution centers in the state.
|Unlike the State Business Tax Climate Index, the Location Matters report takes into account various incentives and programs that can lower a business’ overall tax burden. For new firms, those in business less than three years, Louisiana has the second lowest tax burden in the country and the 10th lowest tax burden for mature firms, those in business 10 years or longer. The state’s aggressive tax programs were able to mitigate high property, equipment and inventory taxes many businesses may incur. Source: Tax Foundation and KPMG. Report is called Location Matters: A Comparative Analysis of State Tax Costs on Business *Total Effective Tax Rate +National average = 100|
In the study, Louisiana ranked first in four of the 14 categories — new capital-intensive manufacturing (steel manufacturer), new labor-intensive manufacturing (truck manufacturer), and new and mature research and development operations (pharmaceutical research).
Both of these studies, though not definitive measures of the quality of our tax system, are a good reference point for lawmakers to see which programs are impacting business development efforts and a community’s bottom line. Louisiana has positioned itself as one of the best states for doing business and for job growth. We should do everything possible to become even more competitive for business by continuing to strive for tax fairness across the board, while aggressively attracting Blue Ocean companies (those companies in new or emerging industries) and addressing the state’s personal income tax, which is the ultimate business inhibitor in Louisiana.
Gregg Gothreaux is president and CEO of LEDA.