Internet tax, a boost to state’s Rainy Day, Retirement Fund
2nd July 2018 · 0 Comments
By Christopher Tidmore
Contributing Writer
For the next seven years, Louisianans will pay an extra .45 percent sales tax thanks to a deal forged between Gov. John Bel Edwards and a bipartisan mix of lawmakers, allowing the Third Special Legislative Session of 2018 to “sine die” three days early on Sunday, June 24, 2018.
Enactment of the new .45 percent tax, which is estimated to produce $463 million this fiscal year and $500 million annually thereafter, nearly was derailed the previous Thursday by 5-4 U.S. Supreme Court decision in South Dakota v. Wayfair. The High Court overturned a 1992 decision prohibiting states from requiring businesses to collect taxes on Internet sales.
Not surprisingly, that same decision promises to create a yearly windfall of between $400 to $500 million dollars for the state’s treasury, after Federal District Courts clarify the ruling for administrative purposes in the next several months.
Thanks to a previous bill signed into law on June 12, 2018 by Gov. Edwards, the Louisiana legislature exactly matched the language of the South Dakota statute in our state’s legal code. Consequently, within the next eighteen months or so, it is estimated that the LA Dept. of Revenue should be able to begin collecting eight percent sales tax on all Internet retail purchases for companies with online sales of more than $100,000. Unfortunately, not soon enough to fix the “Fiscal Cliff” by the end of this fiscal year on June 30.
It is thought however that by 2025, the Pelican State will garner enough money from the internet retail sales tax to replace the .45 percent sales tax enacted two weeks ago. Moreover, if legislators chose a prudent path in the next Regular Session, they can use the intervening seven years to inject enough extra revenue into the Rainy Day Fund and the Retirement Trust Fund to stave off a future operating deficit.
No one really likes sales taxes, neither Republicans opposed to increased taxes nor Democrats worried about its impact on the poor. Still, the nearly half-penny was the only compromise measure that could cross the two-thirds threshold in the House, making Louisiana the state with the highest sales tax in the nation.
By earmarking all of the sales tax revenue produced online, mostly uncollected by the La. Treasury right now (Amazon-aside), the state could replenish the depleted “Budget Stabilization Fund” over the next half-decade and use the remainder to help pay the unfunded retirement benefits that it has promised to government workers.
Quite simply, the Retirement System faces bankruptcy in the next decade if nothing is done. To fulfill all pledged benefits, the state would need to come up with $16.6 billion, or $3,570 for every man, woman and child Louisiana. Phrased another way, that sum far exceeds the state’s official debt number of about $1,500 per resident. Putting an extra $400 million per year for five years into the Retirement Trust Fund, thanks to the Internet sales tax windfall, would not end the crisis, but an extra $2.4 billion might bridge the gap to a future reform.
The excess revenue matched with a serious attempt in the next regular legislative session to further reform the retirement system for future beneficiaries could allow Louisiana to avoid a massive—and yearly—operating deficit. The extra funds might likewise help the short-term deficit picture in the event of an economic downturn.
Currently, state law requires each year either $25 million or 25 percent of non-recurring revenue as well as 25 percent of any budget surplus be earmarked for the “Rainy Day Fund,” as the Budget Stabilization Fund has been colloquially known since its enactment in 1991. However, most of those monies were originally intended to come from unusually high oil severance taxes, anything above $950 million also legally earmarked for diversion into the fund.
The state simply does not produce the oil revenue it did two and a half decades ago. We rarely hit $950 million. Moreover, the current and former governor have drastically drawn upon the Rainy Day Fund leaving it with less than 42 percent of the total it possessed at its height, less than even it contained after the budgetary impacts of Hurricanes Katrina, Rita, and Gustav in 2005-2006.
Mandating that any dollars above $400 million produced by the State Treasury’s 50 percent yearly share of Internet sales taxes be dedicated to the Budget Stabilization Fund—over and above its other funding sources—could allow the state to replenish most of its emergency coffers before the .45 percent sales tax expires in 2025, as well as help bridge the $16.6 billion deficit in the Retirement Trust Fund.
The June 12 law specified that the state would equally divide eight percent sales tax collected online with parish governments, 50/50. The retail research group Civic Economics puts the total online sales tax collections at potentially more than $800 million. In other words, should the state earn $420 million from a total $840 million collected from online sales taxes, $400 million could go to settle the long-term deficit in the retirement system while the extra $20 million would help top off the Budget Stabilization Fund to fight short-term deficits.
If online sales tax collections are strong, matched with the other funding sources, the possibility exists that in the next seven years, the Rainy Day Fund could return to its all-time high of $853.7 million last seen in the 2007-2008 budget cycle.
Gov. Edwards has had to call seven special sessions since 2016 in an effort to plug the state’s shaky finances. The .45 percent sales tax enacted two weeks ago by 74-26 in the House and 33-6 in the Senate promises to break that constant cycle of crisis for a while. But if the legislature does not prudently invest any extra monies earned from online sales taxes to pay for future retirement benefits or to replenish the emergency funds available for an inevitable economic downturn over the next decade, the budgetary crisis the state has endured over the last four years could look minor in comparison to what is coming.
This article originally published in the July 2, 2018 print edition of The Louisiana Weekly newspaper.
