Today, Governor John Bel Edwards of Louisiana (D) released initial details of his 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 plan. Several components come from recommendations made by a tax task force, whose report was issued earlier this year, and our reform book on Louisiana, Louisiana Fiscal Reform, A Framework for the Future. The plan is wide-reaching, with changes to all the major tax types in Louisiana.
The plan is summarized below.
- Individual Income Taxes: The plan would lower the current 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. rates from 2, 4, and 6 percent to 1, 3, and 5 percent. It would also repeal the deduction for federal taxes paid.
- Corporate Income Taxes: The plan would consolidate the state’s five income tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. of 4, 5, 6, 7, and 8 percent into three brackets of 3, 5, and 7 percent. The deduction for federal taxes paid would also be eliminated for corporations in the state.
- Sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. : The 1-cent sales tax increase passed in 2016 would expire as slated at the end of the 2018 fiscal year. The state would also expand its sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. to include a number of services, mirroring the tax base of neighboring Texas. The state would also unify the sales tax bases of the remaining 4-cent state-level sales tax.
- Gross Receipts TaxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. : Governor Edwards proposes to create a new gross receipts tax in Louisiana. The tax, set at 0.35 percent of receipts above $1.5 million, would serve as a minimum tax to the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. . Firms would pay the higher of the two liabilities. The governor suggested during his news conference that additional modifications would be made for some low-margin firms, but those details are yet unavailable.
- Franchise Tax: The state’s franchise tax would phase out over the next 10 years.
We will provide more commentary regarding Governor Edwards’s proposals over the coming days and weeks as details are released. The Louisiana legislative session begins on April 10, 2017.
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