Governor’s consultant cautions against taxing services

Gov. Bobby Jindal’s accounting firm consultants wrote a report this week cautioning against expanding state sales tax bases to encompass services that are part of businesses’ regular expenses.

In another report on Jindal’s tax system proposals, unrelated but released Friday, an LSU poll showed 47 percent of Louisiana residents want a tax revamp — just not the version pushed by the governor.

Jindal proposes eliminating state’s personal and corporate income taxes and corporate franchise taxes in favor of a higher state sales tax rate and taxing currently untaxed services. The governor’s proposed revamp of the state tax code includes applying a 6.25 percent state sales tax rate to a number of services, notably a wide range of services that businesses purchase from other businesses.

Among the services that would be taxed are accounting, computer programming, advertising, computer system design and employment services.

Ernst and Young, a so-called “Big Four” accounting firm hired by Jindal to help crunch numbers, wrote in a report that a large portion of the revenue generated by broadening sales tax bases comes from collecting on business-to-business service sales, which could lead to problems.

The state’s largest business lobby, the Louisiana Association of Business and Industry, already warned that it opposes significantly increasing the tax burden on businesses.

LABI President Dan Juneau wrote a column Friday pointing to Ernst and Young’s analysis on taxing services.

“Its findings ... are very relevant to the deliberations that will soon begin in our Legislature,” Juneau wrote.

Writing for the Council on State Taxation, a Washington, D.C., nonprofit trade association, Ernst and Young cautioned that such sales tax base expansions encourage businesses to do services in-house; put companies at a competitive disadvantage; and can result in higher consumer prices.

The report can be found at http://www.cost.org/workarea/downloadasset.aspx?id=83841

Jindal declined an interview request Friday.

In a prepared statement, Jindal said the Ernst and Young report also showed that most states already tax many business purchases.

“Texas already imposes sales taxes on considerably more business services than does Louisiana. While other states have proposed and/or implemented plans to tax business services as a way of increasing total state tax revenues, we are proposing to eliminate income and franchise taxes, resulting in a revenue-neutral outcome,” Jindal said in his statement.

Ernst and Young declined to comment on the report.

Among Ernst and Young’s observations was that taxing business purchases can be bad for businesses and consumers by reducing investment, cutting jobs and creating higher consumer prices.

“Several states that have adopted major sales tax changes that extended the sales tax to business purchases of inputs have subsequently, and often quickly, voted to repeal the extensions,” Ernst and Young cautioned, adding that several states quickly repealed such expansions.

Proposals to expand the sales tax base in Minnesota and Nebraska collapsed before legislative debate could begin this year.

Kirby Goidel, professor at the LSU Manship School of Mass Communication who heads the team that conducts an annual poll of where Louisiana residents stand on various issues, included questions about the tax plan in the 2013 Louisiana Survey. The poll questioned 930 people between Feb. 8 and March 17. The margin of error was plus or minus 3.6 percentage points.

“We don’t find a whole lot of support for the governor’s idea specifically and not a whole lot of real dissatisfaction with taxes in Louisiana,” Goidel said Friday.

In the poll, 45 percent said state sales taxes already are too high; 58 percent support additional taxes on tobacco; nearly two out of three think the current tax system is moderately fair; and 17 percent embrace the governor’s tax plan.

Goidel said the survey’s numbers show that the governor may need to do a better job of selling his proposal.

“In Louisiana, the governor’s always powerful, so it’s hard to ever rule out a plan. But it does tell me that they have some real work to do,” Goidel said.

The governor is encountering significant resistance as he prepares for his tax plan to be debated in the legislative session that starts Monday.

Jindal pitched the plan as a way to simplify the state’s tax code and put money into the pockets of Louisiana families. His administration said a $500 million tax burden would shift from individuals and businesses but that there would be no impact on the state budget.

The proposal is on hold while the Legislature’s economists and budget analysts crunch the numbers, which have been called into question.