Economic Competitiveness in Louisiana: The Inventory Tax Credit
Louisiana’s local inventory tax is assessed on tangible personal property used in a business. This includes goods awaiting sale, commodities that are in the course of production, and raw materials and supplies. Examples of taxable items include retail or wholesale merchandise, commodities from farms, repair parts, and manufacturing by-products, among others.
For decades, Louisiana has maintained an ad valorem tax on inventory held by manufacturers, distributors, and retailers that is assessed and collected by local government. In 1991, the Louisiana Legislature authorized a five-year phase-in of a state refund of the local inventory tax paid by such businesses, which was a major step to make the state more competitive for business investment and jobs. This complicated approach was enacted rather than an outright repeal of the local tax because the politics of the time prevented the more direct approach of repeal. Instead, the state chose to essentially subsidize local governments, allowing them to keep the revenue, which totaled an estimated $452 million in 2014.
The state inventory tax credit had an immediate positive economic impact and was credited for bringing a number of new warehousing facilities into the state along with the jobs they created. Today, employers across Louisiana receive a tax credit against their state corporate income and franchise tax liability for the amount they paid to local government. Any amount beyond their state tax liability is refunded to employers up to the amount they actually paid to local government. More than 10,000 businesses – from large, multi-national corporations to neighborhood grocery stores – pay inventory taxes to local government and claim the refund from the state, generating about 11 percent of all local property tax collected in Louisiana. The manufacturing industry is the largest sector of the economy that pays the inventory tax, representing nearly one-third of inventory tax credit recipients.
The vast majority of states do not have inventory taxes. In fact, the Tax Foundation estimates only 13 states levy an inventory tax and at least five of these states offer exemptions against the tax. In general, across the country, states are reducing or eliminating taxes on tangible personal property due to their many disadvantages. From 2000 to 2009, Louisiana saw a 41 percent increase in tangible personal property collections per capita, while the US average actually dropped by 15 percent. Inventory taxes are avoided because:…