New Commercial Activity Tax Puts the “Gross” in Gross Receipts

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In the short time John Bel Edwards has been governor he’s shown himself to be a guy who likes to raise your taxes – $2.4 billion so far.1 Now he’s sprung a new one on the people and businesses of Louisiana. Mention the term “gross receipts tax” in a crowd, and you’re certain to elicit more than a few confused reactions. Even the legislators in Baton Rouge had never heard of it. The Governor has coined the term Commercial Activity Tax, or CAT, as his pet name for his newest tax idea, the gross receipts tax.

So what’s it all about? This new tax was not one of the recommendations from the Governor’s own task force, or from any of the other major players who’ve been trying to fix Louisiana’s financial future. Nobody of note outside the governor’s office suggested it, and nobody seems to be pushing for it.2 In fact, legislatures in both Texas and Virginia are on the verge of repealing their versions of a gross receipts tax3.

Those who are knowledgeable about the CAT or gross receipts tax are very opposed to it.

The CAT impacts nearly every business in Louisiana and means that even if companies lose money, they’ll still get hit with a hefty tax bill. Edwards is proposing this new tax, in addition to the $2.4 billion in tax increases last year8.

This tax plan, while new to Louisiana, has been utilized in Europe in developing and low income countries. Economists scoff this type of tax.

The case against the taxes is so strong, and they have been abandoned by so much of the world for such a long time, that it is difficult for a scholar to devote attention to it.”9    The Tax Foundation 10/6/2016

Critics have already risen up against Edwards’ plan; chief among them is GNO, Inc. President Michael Hecht.

While speaking to the Jefferson Chamber in March, Hecht presented five reasons why the new tax is a “bad policy.”

  1. Gross receipts taxes wind up being higher on low-margin businesses, such as grocery stores, than on high-margin companies.
  2. Products are taxed multiple times throughout the production process, with the compounded burden passed on to consumers
  3. The true total tax isn’t transparent
  4. Certain types of companies are “double taxed” under these systems on both income and gross receipts
  5. The tax would make Louisiana less appealing to startups that are unlikely to show profit in their formative years

Other skeptics have expressed concern that this form of taxation could disproportionately impact lower income people, much like individual sales tax.

Stephen Waguespack, president of the Louisiana Association of Business and Industry believes Edwards new tax could “leave the service-based industries” in Louisiana “out in the cold.”  He also pointed out that tax increases put burdens on struggling employers, which leads to an economic recession and lower tax collections.

By ignoring the advice of his specially commissioned task force in 2016, Edwards has rushed out a haphazard, poorly planned tax initiative that other states and nations are currently abandoning, that seems unlikely to solve the budget issues in Louisiana.

Footnotes:

1 http://www.theadvocate.com/baton_rouge/news/politics/legislature/article_135ca256-3cc8-11e6-97bc-ef35a26c7f1a.html

2 http://www.theadvocate.com/baton_rouge/opinion/stephanie_grace/article_16e8835e-10b2-11e7-bdd7-d7be45bd58ae.html

3 https://www.forbes.com/sites/patrickgleason/2017/03/30/grt/#2ca82eb55377

4 https://www.forbes.com/forbes/welcome/?toURL=https://www.forbes.com/sites/patrickgleason/2017/03/30/grt/&refURL=&referrer=

5 http://www.theadvocate.com/baton_rouge/opinion/lanny_keller/article_7b599266-1340-11e7-b4a2-0f2a0145320b.html

6 https://www.businessreport.com/business/gov-john-bel-edwards-idea-tax-corporate-sales-little-support-among-business-groups

http://www.theadvocate.com/baton_rouge/opinion/stephanie_grace/article_16e8835e-10b2-11e7-bdd7-d7be45bd58ae.html

8 http://www.theadvocate.com/baton_rouge/news/politics/legislature/article_135ca256-3cc8-11e6-97bc-ef35a26c7f1a.html

9 https://taxfoundation.org/gross-receipts-taxes-theory-and-recent-evidence/