1 TEXAS VS. LOUISIANA THROWDOWN!An Industry Tax Comparison and Tax Reform Possibilities Jason M. DeCuir, Principal, Ryan LLC LCA & LMOGA Post-Session Governmental Affairs Committee Meeting Jaye Calhoun Partner, Kean Miller LLP Camille Conaway Senior Vice President, Policy & Research, LABI 7/19/2017

2 Business Taxes and The State BudgetLegislative Recap: Business Taxes and The State Budget July 2017

3 State Taxes, Licenses, and Fees (in millions)The End of Temporary Taxes and a “Fiscal Cliff” in 2018 State Taxes, Licenses, and Fees (in millions) Source: House Fiscal Division, Legislative Fiscal Office, and Revenue Estimating Conference data

4 A Historic Level for FY18 State Budget Due to Temporary Taxes29.8 29.7 29.4 28.9 27.9 26.7 25.5 25.4 25.6 25.4 25.5 25.1 18.7 17.5 Record High Level of State Funds in the Budget Source: Louisiana State Budget FY05-FY17; Unofficial Re-Engrossed Appropriations Bill FY18

5 Most Dollars Remain Locked UpSource: Louisiana State Budget FY18 (DOA) Appropriated

6 So What Happened to “Fiscal Reform?”Comprehensive fiscal reform was expected this year because it is a fiscal session – the last regularly scheduled fiscal session before the temporary 1% sales tax expires next July 2018. Various task forces met throughout 2016 and 2017 to prepare for this year’s fiscal session, offering numerous recommendations. However, the only major proposal to backfill the shortfall was the Governor’s surprise Commercial Activity Tax (CAT) announced in March, which was panned almost universally by tax experts nationwide. It ultimately failed with bipartisan opposition. In the aftermath of the $1.3 billion tax increase in 2016, there is a drumbeat growing against new taxes, as seen with the failure of local taxes statewide on the April ballot and grassroots activism in the session. Since the CAT failed, neither the Governor nor the Legislature has proposed or debated any other significant revenue-raising legislation or fiscal reform to address the 2018 shortfall.

7 So What Are the Legislature’s Short-Term Options Now?Budget reductions and/or reform New forms of business taxes Corporate income and franchise tax and credits Individual income tax Sales tax Base expansion Services Renewal of 1%

8 And What Are the Legislature’s Short-Term Options for Business?Inventory NOLs Reduction and repeal of income tax credits Permanent business sales taxes Surprise! Utilities MM&E Services

9 Business Exemptions and Credits Are Down, But Collections Are Still Below REC ProjectionsTax Type FY15 Amount FY16 Amount Change Inventory tax credit $570 million $226 million -60% Net Operating Loss deduction $319 million $112 million -65% Nonresidential utilities exemption $337 million $138 million -59% Severance exemptions (all) $380 million $196 million -48% Credit for taxes paid in other states $104 million $51 million -51% FY17 target: $412m FY17 to date: $367m PRELIMINARY FIGURES Source: REC; LDR Tax Exemption Budget released March 2017

10 And the Louisiana Economy is Still Struggling30,000 private-sector jobs lost from peak in Dec to trough in Sept. 2016 Employment Growth Month Over Month (% change) – Legislative Fiscal Office Data

11 RECAP OF 2017 REGULAR LEGISLATIVE SESSION

12 Governor’s Proposal vs. HCR 11 Recommendations

13 Governor’s Proposal vs. HCR 11 Recommendations

14 Governor’s Proposal vs. HCR 11 Recommendations

15 Governor’s Proposal vs. HCR 11 Recommendations

16 Governor’s Proposal vs. HCR 11 Recommendations5 year projection  

17 Governor’s Proposal vs. HCR 11 Recommendations

18 La vs. TX: a COMPARISON OF BUSINESS TAX CLIMATE

19 2017 State Business Tax Climate IndexLouisiana ranks 41 in the State Business Tax Climate Index, which shows how well states structure their tax systems, and provides a roadmap for improvement.

20 2017 State Business Tax Climate Index

21 2017 State Business Tax Climate Index Ranks and Component Tax Rates

22 State-Local Tax Burden RankingsThe state and local tax burden is based on the percentage of average income vs. taxes paid

23 State-Local Tax Burden Rankings

24 States with Highest/Lowest Tax Burdens (fiscal year 2012)Highest Tax Burden Lowest Tax Burden

25 Taxes Included in State-Local Tax BurdenGeneral sales taxes Property taxes Individual income taxes Corporate income taxes Severance taxes Excise taxes License taxes Estate, inheritance and gift taxes Documentary and stock transfer taxes Special assessments for property improvements Miscellaneous taxes not classified above

26 Sources of State & Local Tax Collections

27 State Tax Revenue ComparisonPIT 5.8%

28 CREDITS & INCENTIVES

29 Credits & Incentives. LA Industrial Tax Exemption: La. Const. artCredits & Incentives LA Industrial Tax Exemption: La. Const. art. VII, § 21 Immovable and corporeal movable property are subject to annual property taxes at assessed value For most business property assessed value is 15% of fair market value (25% for public service properties) as determined by Tax Commission Regulations The Industrial Tax Exemption makes manufacturing property non-taxable for 10 (now 8) years A renewal application must be filed after the first five years (now extended max of 3 years) Administered by LED (recommends to Bd of Commerce and Industry)

30 Credits & Incentives Executive Order JBE 16-26: ITEP ChangesLocal governing bodies will be able to participate in decisions regarding local property tax exemption Local government approval now required before approaching state Board of Commerce and Industry Exemption will require proof of job creation and/or retention LED will use cooperative endeavor agreements and involve locals

31 Credits & Incentives PILOT Issue UpdateITEP now gives you 8-10 years of tax exemption CEA Validation process in light of recent case (Can’t do PILOT through CEA process) Constitutional amendment/enacting legislation which would have made property subject to PILOT exempt from tax Got out of house but was killed in Rev & Fisc

32 Credits & Incentives Texas: Industrial Tax Exemption Benefits Chapter 312 TX Prop Tax Code – Local taxing unit agrees to tax abatement exempting all or part of the value increase from real property and/or tangible personal property for up to 10 years Chapter 313 Tx Prop Tax Code- School district may agree to limit appraised value on new development projects Local application process Also, certain sales tax programs, freeport, goods in transit exemptions and other incentives available

33 Credits & Incentives C-WIP: 2017 Constitutional Amendment?Constitutional amendment proposed to exempt construction work in progress from property tax Assessors have always treated as exempt but one assessor in a SW LA parish was considering assessing SB 140 on ballot for Oct. 14, 2017 All of industry orgs working to educate public and to garner support

34 Credits & Incentives HB 237 (Barras) – Extends Enterprise Zone ProgramExtends the sunset date for the Enterprise Zone Program until July 1, 2021 SB 178 (Morrell) – Eliminates Certain Credits & Incentives Eliminates certain credits and incentive programs on July 1, 2017 and 2021 SB 183 (Morrell) – Sunsets Certain Incentive & Rebate Programs Sunsets certain credits and incentive programs on July 1, 2017 and 2022 Changes to quality jobs program applicable for advance notifications filed on/after July 1, 2017 SB 79 (Luneau) – Makes 28% Reduction to Certain Credits Permanent Repeals sunset date and makes permanent the 28% reduction to certain tax credits originally made during 2015 Regular Session Applicable to tax periods beginning January 1, 2017 SB 172 (Morrell) – Sunsets Multiple Tax Credits No impact to inventory tax credit Sunsets several credits on January 1, 2020 and 2022

35 Credits & Incentives Severance TaxHB 461 (Bishop) – Production from Inactive / Orphan Wells Provides reduced severance tax rates for a 10-year period in lieu of 100% exemption for a 5-year period 50% rate reduction for production from an oil or gas well inactive for 2 years 75% rate reduction for production from wells designated as “orphan wells” for more than 60 months Application must be filed between July 1, 2018 and June 30, 2023 Effective July 1, 2018

36 SALES TAX

37 Sales Tax Sales Tax Restructuring (HCR 11)Make Act 26 of 1st Special Session of 2016 permanent Make Act 12 of the Second Special Session of 2016 permanent Expand sales tax base to include new services (similar to Texas) Reduce state sales tax to a minimum of 4% Centralize sales tax collections Create Rebate Program for MM&E

38 Sales Tax Notable Ranking Changes in 2017 Index

39 Sales Tax State & Excise Tax Rates (as of July 1, 2016)

40 Sales Tax State Sales Tax Bases: Exemptions for Business-to-Business Transactions

41 *Local government’s tax both groceries and prescription medicationSales Tax State Sales Tax Bases: Consumer Goods & Services (as of July, 2016) * * *Local government’s tax both groceries and prescription medication

42 Sales Tax Services

43 Sales Tax Services

44 Sales Tax Sales/Use Tax Bills that passed 2017 Regular Session

45 Sales Tax Sales/Use Tax Bills that passed 2017 Regular SessionHB601 – establishes a Louisiana Uniform Local Sales Tax Board 8 Member Board From local municipal associations Board duties: Promulgate local rules and regulations Issue policy advice and develop uniform forms and model procedures to be used by locals Issue private letter rulings Establish VDA programs Develop multi-parish audit procedures Develop multi-parish refund claim procedures Remedy for situations in which 2 parishes are trying to collect on the same transaction

46 Sales Tax Sales/Use Tax Bills that failed 2017 Regular Session

47 Sales Tax Sales/Use Tax Bills that failed 2017 Regular SessionHB673 (Rep. Stokes) – recodification of sales tax code The intent of the author was to recodify the sales tax code and to simplify by: Converting 40 exclusions to exemptions Removing some exclusions/exemptions in their entirety when repetitive If an item could have been subject to an exclusion/exemption in multiple sections of the code, the proposal was to consolidate into one exemption. This was most prominent with respect to the definitional section of the code. Attempted to uniform the state and local tax base by eliminating some exclusions/exemptions and making them refundable

48 Sales Tax MM&E For the period April 1, 2016, a list is provided of state sales, purchase, use, lease or rental tax exemptions and exclusions that will continue to be operative and in effect with regard to the additional state sales tax levied pursuant to La. R.S. §47:321.1 The sales tax exclusion for the purchases, use and lease of manufacturing machinery and equipment as provided in La. R.S. §47:301(3)(i), (13)(k), and (28)(a) shall not be operative and in effect until July 1, 2016 See RIB See LDR Publication R-1002A (04/16) Acts 25 and 26 - Taxable Rate of Transactions for Exemptions and Exclusions This table explains the changes enacted by Act 25 and 26 of the 2016 First Special Session of the Louisiana Legislature

49 Sales Tax JAYE Biz UtilitiesUpdate on HCR 8 lawsuit First Circuit affirmed the lower court, finding HCR 8 constitutional Writ application filed with LA Supreme Court Both sides have briefed the issue Revenue Raising Legislation requires a bill that originates in the House Passed without 2/3 vote Terrible precedent Waiting to hear from the Supreme Court

50 PROPERTY TAX

51 Property Tax Property Tax Reform (HCR 11)Maintain the Homestead Exemption Provide for a permanent role by local government in granting the Industrial Tax Exemption Expand use by local governments of payment in lieu of tax (“PILOT”) Phase out the Inventory Tax over a ten-year period (constitutional) Phase out the Inventory Tax Credit over a five-year period Phase out the Ad Valorem Tax Credit for Natural Gas over a five-year period

52 Property Tax Act 5/SB 10 (Ward) - $57M (2016 Second Special Session)Manufacturers receiving the benefits of the ad valorem industrial tax exemption (ITEP) only entitled to non-refundable state tax credit for local ad valorem taxes paid on inventory Credit may be carried forward for up to five years Act 385/SB 182 (Morrell) – (2017 Regular Session) For purposes of the credit refundability limitations, affiliated taxpayers are only considered to be a single taxpayer if included in a consolidated federal income tax return Effective upon Governor’s signature Act 4/SB 6 (Morrell) - $ 13M (2016 Second Special Session) Creates a tiered system in which the inventory tax credit would be refundable and non-refundable First $500,000: Refundable $500,000 - $1M: 75% refundable; 25% carry-forward Over $1M: Carry-forward (five years)

53 CORPORATE INCOME & FRANCHISE TAX

54 Corporate Income & Franchise Tax Recent Changes To CIT/FITChanges to Apportionment Rules for Business Income Singles Sales Factor Market-Based Sourcing Throwout Rule Expansion of Franchise Tax to LLC’s Addback of Expenses for Related Parties Will these changes generate more revenue?

55 Corporate Income & Franchise Tax Act 8 (HB 20): Single Sales Factor/Market SourcingProvides for single sales factor apportionment and market-based sourcing for transportation and service providers, with a double-weighted sales factor for integrated oil and gas companies and pipeline transportation companies Sales other than sales of TPP are sourced to LA if the taxpayer’s market for the sale is in the state Applicable to all taxable periods beginning on or after January 1,2016

56 Corporate Income & Franchise Tax Act 8 (HB 20): Market SourcingMarket is in LA, if: Sale, rental, lease, or license of real property or tangible personal property, if and to the extent the property is located in the state Sale of service, if and to the extent the service is delivered to a location in the state delivery of tangible medium representing the output of a service does not control the sourcing of receipts from the underlying service Intangibles Lease or license of intangible property, including a sale/exchange where the receipts derive from payments that are contingent on the productivity, use, or disposition of the property, if and to the extent the property is used in the state Sale of other intangible property if a contract right, government license, or similar intangible authorizing the holder to conduct a business activity in a specific geographic area, if, and to the extent the property is used in or “otherwise associated with” the state Throwout rule for other sales of intangibles

57 Corporate Income & Franchise Tax Act 8 (HB 20): Market Sourcing - Individual CustomersSourced to state where the customer received a “direct personal service” if: Customer is a natural person Service is a “direct personal service” Services that are not direct personal services are delivered to customers who are natural persons with a Louisiana billing address shall be sourced to Louisiana In the case where the sourcing methodology specified above “fails to clearly reflect the taxpayer’s market in this state, the taxpayer may utilize, or the department may require, the use of other criteria or methodologies that will reasonably approximate the taxpayer’s market in this state” If taxpayer uses an alternate approach, must attach a detailed explanation of why statutory method was unreasonable and an explanation of the alternative method used Failure to attach statement creates presumption of consent to statutory method

58 Corporate Income & Franchise Tax Act 8 (HB 20): Market Sourcing – Unrelated Business CustomersSourced to state where services has a “substantial connection to a specific geographic location” If there is a substantial connection to more than one state, “sales shall be reasonably sourced between those states” If no “substantial connection” with a specific geographic location, sourced to the commercial domicile of the taxpayer In the case where the sourcing methodology specified above “fails to clearly reflect the taxpayer’s market in this state, the taxpayer may utilize, or the department may require, the use of other criteria or methodologies that will reasonably approximate the taxpayer’s market in this state” If taxpayer uses an alternate approach, must attach a detailed explanation of why statutory method was unreasonable and an explanation of the alternative method used Failure to attach statement creates presumption of consent to statutory method

59 Corporate Income & Franchise Tax Act 8 (HB 20): Market Sourcing – Related Business CustomersSecretary to promulgate rules concerning the sale of services between related entities Related entity includes: A stockholder, stockholder’s partnership, or juridical person, if the stockholder and the stock holder’s partnerships or juridical persons own directly, indirectly, beneficially, or constructively, including as provided for in 26 USC 318, in the aggregate, at least 50% of the value of the taxpayer’s outstanding stock “Related party” is any member of a controlled group defined by reference to 26 USC 1563

60 Corporate Income & Franchise Tax Act 8 (HB 20): Market Sourcing – Nonbinding Mediation & Throwout Rule If a taxpayer is subjected to different sourcing methodologies regarding intangibles or services by the Department and one or more other state taxing authorities, the taxpayer may petition for, and the Department shall participate in, and encourage other state taxing authorities to participate in, non-binding mediation in accordance with the rules promulgated under the APA Throwout Rule – If the taxpayer is not taxable in a state to which a sale is assigned or if the state of assignment cannot be determined or reasonably approximated, sale is excluded from both numerator and denominator See also Louisiana Revenue Bulletin No (Jul 19, 2016)

61 Corporate Income & Franchise Tax Act 12 (HB 19): Expansion of Franchise Tax to Other EntitiesAmends La. R.S. §12:1368 and La. R.S. §§ 47:601(A)(3), (C)(1) and (3), 602(G) and (H), and 611 Expansion of definition of “domestic corporation” subject to franchise tax, which now applies to: All corporations (prior law) All entities taxed as corporations for federal income tax purposes Does not apply to: LLCs eligible for S election “Any other entity that was acquired before January 1, 2014, but not earlier than January 1, 2012, by an entity that was taxed pursuant to 26 U.S.C. Subtitle A, Chapter 1, Subchapter S” For both income and franchise tax purposes, Louisiana’s treatment of LLCs follows federal tax treatment

62 Corporate Income & Franchise Tax Act 12 (HB 19): Expansion of Franchise Tax to Other EntitiesProvides for a holding company deduction for any corporation, as defined in R.S. §47:601(C), that is subject to the franchise tax imposed by R.S. §47:601(A) and that is not subject to R.S. §47:602(B), (C), (D), (E), or (F), that have one or more subsidiaries. Can deduct from taxable capital investments in and advances to one or more subs, whether made directly or indirectly Increases the initial franchise tax (paid in advance) from $10 to $110 Effective for taxable periods beginning on or after January 1, 2017

63 Corporate Income & Franchise Tax Act 16 (HB 55): Intercompany Expense AddbackRequires that certain deductible interest expenses, intangible expenses, and management fees be added-back when computing corporation income tax liability by enacting La. R.S. §47:287.82 Requires corporations to add-back otherwise deductible items, specifically: Interest expenses and costs Intangible expenses and costs Management fees Directly or indirectly paid, accrued, or incurred to or with one or more related members Unless certain safe harbors apply Effective for all tax years beginning on or after January 1, 2016

64 Corporate Income & Franchise Tax Act 16 (HB 55): Intercompany Expense AddbackSafe harbors include: Subject to Tax Exception - If the corresponding item of income was in the same taxable year either subject to a tax based on or measured by the related member's net income in Louisiana or any other state, or was subject to a tax based on or measured by the related member's net income by a foreign nation which has an enforceable income tax treaty with the United States, if the recipient was a "resident" as defined in the income tax treaty with the foreign nation; or Substantial Business Purpose Exception - the transaction giving rise to the interest expenses and costs, the intangible expenses and costs, or the management fees between the corporation and the related member did not have as a principal purpose the avoidance of any Louisiana tax. Conduit Exception - If the transaction giving rise to the interest expenses and costs, intangible expenses and costs, or the management fees has a substantial business purpose and economic substance and contains terms and conditions comparable to a similar arm's length transaction between unrelated parties, the transaction shall be presumed to not have as its principal purpose tax avoidance, subject to rebuttal by the Secretary of the Department of Revenue. Regulations

65 Corporate Income & Franchise Tax Will we see GRT Proposals Again?CAT BAT Should the franchise tax be repealed? Any trade-offs? Repeal FIT/single flat rate

66 OTHER ISSUES

67 How Do We Make Louisiana More Competitive?Simplify sales tax administration and structure Reduce marginal rates Do not tax business inputs or business to business transactions Reduce the number of taxes (franchise tax, inventory tax, etc.) Reduce the number of exemptions Restructure state/local funding and control

68 DO WE REALLY WANT TO BE LIKE TEXAS?

69 Do We Really Want to be like Texas?State Business Tax Climate Texas – 14 (top 15) Louisiana – 41 (bottom 10) State-Local Tax Burden Texas - 4th best (7.6%) Louisiana – 5th best (7.6%) Texas’ Tax Structure No Individual income tax No Corporate income tax No Corporate franchise tax Modified Gross Receipts tax “Texas franchise tax”

70 Do We Really Want to be like Texas?Sales tax Max combined state and local sales tax rate is 8.25% Uniform tax base between state and local government Centralized sales tax collection Manufacturing exemption for business utilities Does not tax MM&E Does not tax raw materials Expanded service base Generates roughly 54% of all state tax revenue

71 Do We Really Want to be like Texas?Property Tax Accounts for roughly 46% of all state and local taxes combined Local option for homestead exemption Assesses property at 100% of fair market value Solely local control of business property tax abatement Local option to exempt inventory (“Freeport and Goods in Transit”) Taxes the “reserves” for oil and gas

72 Do We Really Want to be like Texas?Severance Tax Both oil and gas are taxed based on value Oil is taxed at 4.6% Gas is taxed at 7.5%

73 Who’s to Blame for the Fiscal Cliff?The Governor? Legislative Leadership? Republicans/Democrats? The people? Government Groups? Business & Industry?

74 Possible Scenarios for Resolving the Fiscal CliffExtend full or partial penny permanently Extend full or partial penny temporarily Comprehensive tax reform Constitutional Convention OR Do nothing…

75 Contact Information Jaye Calhoun Partner Kean Miller LLP Jason M. DeCuir Principal Ryan, LLC Camille Conaway Senior Vice President, Policy & Research LABI