Chris John: Tax credit changes will cost the industry more

03 16, 2015 by The Advertiser

In a 1937 song, George Gerswhin sings the memorable line, “you say tomayto, I say tomahto” — highlighting the differences in two characters’ interpretation of the same word. That came to mind as I reviewed the latest budget set to go before the Louisiana Legislature this year. In an effort to shore up the deficit, this budget attempts to convert 12 tax credits from “refundable” to “non-refundable.” Most notably, this includes the inventory tax credit program and the ad valorem credit for offshore vessels. A debate sprung forth as to whether or not this should be viewed as a tax increase on business.

Proponents of this budgetary move claim it is revenue neutral; the business community says otherwise. Let me explain.

The inventory tax credit is a method in which a business is eligible to receive a tax credit from the state equal to the inventory taxes paid to local governments. Louisiana is one of 13 states that have an inventory tax, dating back to the 1800s. Parishes rely on the proceeds of this tax to fund a number of important projects and services. Recognizing the inherent disadvantage this unique tax presents to Louisiana businesses, the Louisiana Legislature enacted the credit in 1991 to offset the burden of this tax. This move has enabled Louisiana business to continue growing, teeing up the “Energy Renaissance” in manufacturing that Louisiana is currently experiencing.

The Ad Valorem tax credit for offshore vessels operates in much the same way. This credit is allowed for vessels that operate principally in the Outer Continental Shelf (OCS) Lands Act waters. The taxpayer must demonstrate that the vessel operated principally in the OCS within the calendar year.

The current budget proposal makes a seemingly esoteric change to the application of these tax credits. The plan alters the credit’s application to not exceed a business’ corporate income and franchise tax liability, regardless of the actual amount paid to the parishes. In other words, a company’s tax liability will determine the credit, not the dollar amount in taxes paid. From the state’s perspective, this is not a tax because the credit balances the income and franchise tax exposure. Ignoring the actual tax amount being paid locally to the parish allows them this stance.

In reality, this is a tax increase on the over 10,000 businesses that pay the tax — including refineries and manufacturers. All told, this change will negatively affect 12 credits totaling an astonishing $526 million. That sounds like a definite increase in the price of doing business — whatever term you want to call it.

Bottom line, we can get lost in the debate of how to categorize this shift and what the preferred pronunciation of “tomato” is. But the fact remains: this is a debilitating hit to companies that choose to do business in Louisiana. Don’t get lost in the minutiae.

And finally, the name of the Gershwin song mentioned earlier? “Let’s Call the Whole Thing Off.” Not a bad idea.

— Chris John, former congressman, is president of the Louisiana Mid-Continent Oil & Gas Association.