It’s no secret that the business climate in Lafayette is pro-growth and entrepreneur friendly. Locals have been very successful in opening businesses offering any imaginable good or service. However, while locals see first-hand the vibrancy of Lafayette’s economy, what about out-of-state entrepreneurs and corporations looking to expand — will they be able to see past Louisiana’s historically unfriendly business environment to catch a glimpse of an emerging, friendlier state?

As economic developers, we understand that Lafayette cannot and does not operate in a vacuum. We’re a part of the whole of Louisiana, and we often have to cope with unfavorable obstacles whether real or perceived. Lafayette’s competitive advantage lies not only within the parish lines, but within the state boundaries. In order for Lafayette to be competitive with cities like Mobile, Louisiana must be competitive with Alabama. 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.

The Tax Foundation compiles the State Business Tax Climate Index as a tool to gauge how states’ tax systems compare to each other. The index measures five types of taxes — corporate, individual income, sales, unemployment, and property. Each component is ranked on a scale of 0 to 10. Louisiana’s average score on the 2008 index is 5.02 and overall rank is 32nd. While the state managed to stay out of the bottom 10 nationally, these scores still leave room for much improvement regionally. Gulf South states have traditionally led the charge in pro-business tax environments, hovering around or above the top third mark in the Tax Foundation’s index. Louisiana’s index ranking of 32 places it last among its Gulf South peers. In an effort to revamp Louisiana’s business image, a special legislative session was called in March of this year and successfully addressed the reduction of several business taxes.

As part of the effort to make Louisiana’s companies more competitive, the “permanent penny” of the sales tax on utilities was repealed. Furthermore, as of July 1, 2008, the tax on electricity and natural gas will be reduced from 3.3 percent to 2.3 percent, and water and steam will be decreased from 3.8 percent to 2.8 percent. The remaining tax is scheduled to be fully eliminated on July 1, 2009. All purchases of butane and propane will be excluded from the state sales tax, effective July 1 of this year. The “temporary tax” that began as a stop-gap measure in 1986 and was expanded through the next decade will no longer be collected as of July 1, 2009. Louisiana businesses will have a major disincentive removed, as Texas and Alabama do not have this tax.

The sales tax on manufacturing machinery and equipment put businesses, especially manufacturers, at a competitive disadvantage when it came to the upfront cost of purchasing machinery and equipment. The existing phase-out of the state sales tax will be accelerated by one year. The lease or purchase of this type of equipment will be tax free at the state level beginning July 1, 2009. Louisiana is one of only three states in the country that taxes manufacturing machinery and equipment, and the only southern state that fully taxes this property.

Also passed in the special session was the accelerated elimination of the corporate franchise tax on debt by one year. Beginning in the year 2011 (instead of 2012), all borrowed capital will be excluded from the corporate franchise tax base. Louisiana is one of only two states in the nation that imposes this tax on debt. Obviously, taxing debt is a disincentive to investment, expansion, and job creation, especially for small and start-up businesses.

Louisiana is one of only 16 states to see a rise to a better position on the Tax Foundation’s 2008 index. Since the index debuted in 2003, Louisiana’s ranking has climbed six places. The only other states that have increased at a higher rate are Arizona, Montana, and North Dakota. With the recently passed business-friendly legislation, the Pelican State’s ranking will only continue to improve.

Despite the limitations of Louisiana’s tax system, the state does offer one of the most comprehensive incentive packages in the nation, which in some cases can outweigh and lessen a hefty tax burden.

One of the most asked about incentives is the Louisiana Quality Jobs Program, which offers payroll and sales tax rebates to companies that create quality jobs for Louisiana residents. Quality jobs are those jobs that pay at least $14.50 an hour; offer a basic health care plan covering at least 85 percent of the total premium for a full-time employee; and are part of Louisiana’s Vision 2020 cluster industries. A company may receive a rebate of up to 6 percent of the new gross annual payroll depending on the wages paid to these new employees.

New job creation is the cornerstone for many of the tax incentives offered by the state, and the Enterprise Zone program is no exception. Any business (other than those involved in gaming, churches or residential development) that will add new permanent jobs, either full-time or part-time, may qualify. A $2,500 tax credit may be earned for each net new permanent job created during the growth period. This credit may be used toward state income or franchise taxes. In addition, if this period of growth involves the construction of a new facility or the expansion of existing property, the business may also be eligible for a rebate of the 4 percent state sales tax on materials used in construction and on machinery and equipment purchased as part of the permanent facility.

Other incentives include property tax exemptions, Freeport laws for goods in transit, investor tax credits, industry-specific tax incentives and grant programs.

With the start of this legislative session under a new administration, Louisiana is in a position to further implement changes started by previous administrations, as well as explore new ways to increase Louisiana’s business friendliness. Despite today’s increasingly global market, most business relocations will still occur between one state and another, not to an overseas location. With that in mind, Louisiana must do everything possible to become and remain competitive for business. Often that starts at the local level. LEDA urges you to educate yourselves on business tax issues that affect your business and get involved in the legislative process. Before Louisiana and her cities and parishes can reach their maximum potential, the state needs to continue cultivating a more tax and regulation friendly attitude toward business.

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