Stelly Plan

The Stelly Plan is a since repealed 2002 tax measure in the U.S. state of Louisiana designed to shift certain state sales taxes on food for home consumption and utilities to increases in state income taxes. Narrowly approved by voters, the proposal soon ran into criticism as middle-class taxpayers complained of paying much more in state income taxes than the amount of reduced sales taxes. The plan is named for former State Representative Victor T. "Vic" Stelly, a Lake Charles Republican, who served in the House from 1988-2004. Removal of the Stelly income tax tables began in calendar year 2009.

In the November 5, 2002, general election, Louisiana voters approved the Stelly Plan, listed on the ballot as Act 88-2002, actually a constitutional amendment. The tabulation was 534,989 (51 percent) to 506,938 (49 percent).

Details of Stelly Plan

Under the Stelly Plan, the state sales tax on food for home consumption and the sales tax on natural gas, electricity, and water for residential use was lowered on January 1, 2003, from 3.9 cents to 2 cents per dollar. Taxes on those items were then eliminated on July 1, 2003. To replace revenue lost through Stelly, individual income tax brackets were adjusted upward. Because individual tax returns for taxable year 2003 were not filed until after January 1, 2004, the withholding tax tables were revised, and the new rates went into effect on January 1, 2003.

Stelly did not affect local sales taxes on food. Only food requiring preparation at home was covered by the reduction in state sales tax. Single-use portions or restaurant meals were not affected by the Stelly Plan. Prescription drugs were already exempt from sales taxes, but Stelly placed that exemption in the state Constitution. Louisiana does not exempt over-the-counter drugs from sales tax, but such items are exempt in neighboring Texas. Stelly also allowed the tax owed by the individual to be distributed over the year 2003. The increase in taxpayer withholding was to have been the same as the savings realized from the elimination of sales taxes under the Stelly Plan. Taxpayers making approximately $80,000 annually saw increases in total state taxes.

Repeal

After years of criticism from those who faced higher taxes as a result of the Stelly Plan, the Louisiana State Legislature in 2008 repealed Stelly. The highest income brackets were returned to the level they were prior to 2003. The tax reduction began in 2009, but the state revenue department did not alter the withholding on individual income tax tables until July 1 of that year. Hence individuals did not receive more disposable income in their paychecks until after July 1 unless they had individually requested that their employers adjust their tax schedules prior to July. The repeal of Stelly could cost the state treasury some $358 million in taxes for the 2009-2010 fiscal year and somewhat less for each year thereafter.

Stelly defenders

The Lafayette Daily Advertiser in Lafayette, which supported the Stelly Plan, described the measure as a "sensible fiscal measure . . . developed essentially to make income taxes, instead of sales taxes, the primary funding mechanism for government."

The Public Affairs Research Council, a business think-tank, said that the loss of income tax revenues would make Louisiana more reliant on less stable petroleum and natural gas revenues and creates the potential for a resumption of the "boom-and-bust cycle".

The Baton Rouge Morning Advocate editorially opposed the Stelly Plan repeal, which it determined reflects legislators yielding to pressure from higher-income taxpayers. The newspaper questioned the repeal of a progressive income-tax-for sales-tax swap and came up with this possible explanation:

"Part of it is human nature: People benefit a little bit every day from the sales taxes eliminated in 2002 by passage of the Stelly Plan. But everybody notices when they write a larger check for state income tax. Lawmakers are responding to aggrieved, mostly affluent constituents who pay big income tax bills.

"This is a commonly cited problem with the sales tax: even the low-income folks who are hit hardest by it often don't notice, because they pay a nickel here and a nickel there rather than one big lump sum. If people don't notice the sales tax when they pay it, it's easy to understand that they wouldn't notice when (as a result of the Stelly sales tax cuts) they're not longer paying it. . . . "

Stelly critics

Governor Bobby Jindal at first opposed the repeal as too costly to declining state coffers but then championed it as public reaction against the measure accelerated.

Jeffrey D. Sadow, a professor of political science at Louisiana State University in Shreveport and active conservative blogger, in 2005 described the Stelly Plan, accordingly: "In essence . . . just another link in the long history of Louisiana tax policy that favors redistribution and discourages economic development. It's that kind of thinking that has gotten us into an economic mess . . . "

Several lawmakers have also opposed the Stelly Plan's removal of certain state income tax deductions. Former legislators Pete Schneider of Slidell, James David Cain of Beauregarde Parish, and Peppi Bruneau of New Orleans attempted unsuccessfully to restore deductions removed for charitable contributions and home mortgage interest.