Louisiana’s budget shortfall has been a constant source of consternation for legislators, who are now convened in their third legislative session of the year (one special session ran Feb.-March, one regular session ran March-June, and now another special session is running June 6-June 23). The singular focus by some legislators and many in the media has been on generating new revenue, but there are some opportunities for true taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform. Today, the biggest opportunity is on the House floor awaiting a vote at 3 p.m. Central: a bill package to change Louisiana’s multi-bracket individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. that tops out at 6 percent to a single rate income tax at 3.8 percent.
Three bills, HB 7, HB 17, and HB 33 would accomplish this reform. HB 33 removes the state’s obscure deduction for federal taxes paid (only three states have this deduction), HB 17 lowers tax rates and removes the state’s personal exemption and excess itemized deductions (swapping the personal exemption for an economically equivalent “zero bracket” below $12,500), and HB 7 caps the income tax rate at a maximum of 4.75 percent for future years.
| Current and Proposed Individual Income Tax Rates | ||||||
|---|---|---|---|---|---|---|
|
Current |
Proposed |
|||||
|
2% |
> |
$0 |
0% |
> |
$0 |
|
|
4% |
> |
$12,500 |
3.80% |
> |
$12,500 |
|
|
6% |
> |
$50,000 |
||||
If this flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. plan passes the legislature, it will require a vote of the people in November to remove the deduction for federal taxes paid, which is currently enshrined in the state constitution. On that November ballot, it would join a ballot question for removing that same deduction in the corporate code which was passed in the first special session. The corporate reform would transform the state’s multi-bracket corporate tax that tops out at 8 percent into a flat rate of 6.5 percent.
True tax reform broadens tax bases while lowering tax rates, and this proposal does both of those things in great measure. If passed, the individual income tax reform of this session would strengthen the state’s economic competitiveness, simplify the tax code, and produce revenue stability in the years to come. This is an opportunity to take the lemons of Louisiana’s budget crisis and turn them into lemonade, enacting one of the more impressive state tax reforms in the last decade.
Be sure to read our book on Louisiana’s tax system, particularly income tax options B and C, which recommend a similar flat tax proposal to the one being considered today.
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