Louisiana Aims at Comprehensive Tax Reform

April 28, 2021

Deliberations which began well before the beginning of Louisiana’s legislative session—which has the nation’s latest start date (April 12th)—have yielded a meaningful package of tax reform proposals. Legislators aim to lower the state’s individual and corporate income tax rates, begin phasing out the capital stock tax, and bring sales tax centralization across the finish line—all goals that would improve the Pelican State’s tax code. They are also exploring elimination of the inventory tax, currently abated using state tax credits, which does not eliminate liability for all firms.

Louisiana ranks 42nd on our State Business Tax Climate Index, which measures tax structure—the how rather than the how much. If enacted separately, each of the proposed major changes would raise that overall score to 40th, getting Louisiana (barely) out of the bottom 10. If all the proposed changes were implemented, Louisiana would improve to 34th. The proposed changes are:

  • Lowering individual income tax rates;
  • Establishing a flat corporate income tax of 6 percent;
  • Repealing the corporation franchise tax;
  • Eliminating inventory from the property tax base; and
  • Centralizing sales tax collections

Louisiana lawmakers will be considering a range of tax reform bills, but the primary effort has been spearheaded by Sen. Brett Allain (R) and Rep. Stuart Bishop (R), who have been facilitating discussions about improving the state tax code and gathering support for their policy priorities. The plan in question aims for revenue-neutral changes that will still improve the state’s competitiveness. Because there are a lot of moving parts to fiscal leadership’s plan, it is worth outlining the many component bills.

Louisiana has long had one of the most complicated sales tax systems in the nation, and the Centralized Sales and Use Tax Administration Study Group has worked to create a system that consolidates collections and administration at the state level, rather than leaving local collections to individual parishes. House Bill 199, which has passed both chambers, would establish the State and Local Streamlined Sales and Use Tax Commission in furtherance of this goal, putting consolidation on the ballot, where a simple majority is required for passage.

Senate Bill 159 allows the legislature to eliminate the deductibility of federal income taxes for both individual and corporate income taxes, and works in tandem with HB 278 to bring down individual income tax rates by eliminating the deduction for federal taxes paid. Because the deduction is enshrined in the state constitution, a constitutional amendment is required to repeal it. The proposed amendment also sets a 5 percent cap on income tax rates. HB 278 sets a new individual income tax rate schedule, retaining the current number of brackets but reducing rates from 2, 4, and 6 percent to 1.85, 3.51, and 4.25 percent in tax year 2023.

Addressing federal deductibility is important for a number of reasons. The deduction causes Louisiana’s “sticker rate” to be significantly higher than it would be otherwise. By eliminating federal deductibility, Louisiana can lower its rates to look as competitive as it always has been. In addition, linking a deduction to federal liability means that Louisiana’s tax code acts as a mirror to the federal code—what is favored on the federal side is penalized on the state side, and vice versa. This means that when taxpayers take advantage of child tax credits, business expense deductions, or anything that reduces tax liability at the federal level, their state income tax liability increases. It also created uncertainty surrounding individuals whose returns made them eligible for supplemental coronavirus rebates above and beyond those they received initially.

HB 279 would phase out the state’s antiquated Corporation Franchise Tax—also known as a capital stock tax—between tax years 2023 and 2026, decreasing liabilities by 20 percentage points each year. Louisiana is one of only 16 states to levy such a tax. In recent years, many states have moved to phase out capital stock taxes, though New York’s tax, which was being phased out, has been extended for another year as part of a broader tax increase package adopted earlier this month. Because they fall on a business’s net worth, capital stock taxes can be especially damaging in times of economic downturn, as they are levied regardless of profit. In response to the coronavirus crisis, Louisiana lawmakers temporarily suspended part of the Corporation Franchise Tax by exempting the first $300,000 of taxable capital, and SB 161 would extend that partial exclusion until tax year 2026, when HB 279 will have fully phased out the tax for all businesses, if enacted.

Louisiana is one of nine states that fully tax business inventory (called the ad valorem tax), but among those nine, Louisiana is unique in that it reimburses businesses for inventory tax payments. That, essentially, creates an atypical state-to-local revenue sharing system that causes timing issues for firms that cannot fully take advantage of the offsetting tax credits, which are not refundable. SB 158 eliminates the middleman—and the liability for some firms—by phasing out the ad valorem tax between tax years 2023 and 2026 by exempting 25 percent of assessed value each year. To ensure that localities still receive the funding they need, the state will create a Supplemental Revenue Sharing Fund to distribute funds, first based on parish population, and then distributed within each parish based on their past ad valorem tax collections.

Previous discussions from this group of legislators also addressed the 8 percent corporate income tax, which also features federal deductibility. Several different bills are aimed at this issue, but there is some overlap that may need to be addressed.

HB 274, another constitutional amendment, allows corporate income tax rates to be set independently of individual income tax rates, but retains federal deductibility for the corporate income tax while granting the legislature discretion on the deduction under the individual income tax. HB 292, which recently passed the House and is now pending in the Senate, would then provide the statutory adjustment by eliminating federal deductibility for corporations. HB 293, also awaiting action in the Senate, would establish a flat rate of 6 percent starting in tax year 2023. Such a decrease would give the state lower rates than neighboring Arkansas, while still surpassing the 5 percent top rate in Mississippi and the lack of a conventional corporate income tax in Texas.

Separately, Rep. Neil Riser (R) introduced HB 275, a constitutional amendment that removes the federal deductibility mandate for corporate income taxes. However, it does so by inserting the word “individual” in the constitution, thus solidifying the deduction for individual income taxes instead of paving the way for its future removal.

While many of these bills work in tandem, some conflicts continue to exist, which legislators will be required to sort out. If lawmakers were able to repeal federal deductibility, reduce income tax rates, finish the job on inventory taxation, and phase out the capital stock tax, this would represent a marked improvement in the state’s tax climate, eliminating several of the most uncompetitive features of the current code.

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A 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.

An 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.

A 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.

A tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.