New Tax Plan Emerging in Louisiana’s Special Session?

Louisiana’s special session, which was convened to address a $900 million budget deficit, is starting to heat up. In my update last week, I reviewed some of the tax proposals being forwarded by the governor’s administration, and linked to the testimony I presented to the Louisiana House Ways & Means Committee in Baton Rouge last Tuesday.

The update yesterday from Tyler Bridges of the Advocate on the political situation was:

House and Senate leaders have agreed that the political will doesn’t exist to make deeper cuts to state government programs. But not enough Republicans in the House at this point are willing to vote for additional taxes to produce the extra $150 million to $200 million that legislative leaders say is needed to plug the current year’s budget shortfall.

Today, Representative Julie Stokes (R-Kenner), an important member of the Ways & Means Committee, is trying to assemble a coalition around a plan that is designed to bridge this gap. Elements of this plan are included in current bills by Rep. Stokes, Rep. Walt Leger III (D) and Rep. Katrina Jackson (D).

The major provisions are:

Individual Income Tax

• Convert multi-bracket system with top rate of 6 percent to a 4.3 percent flat tax with a zero bracket at $0-$12,500
• Repeal the deduction for federal income taxes paid (this would take a vote of the people)
• Repeal excess itemized deductions
• Repeal the state’s standard deduction/personal exemption, which would be replaced by the generous zero bracket

Corporate Income Tax

• Convert multi-bracket system with a top rate of 8 percent to a flat 6.5 percent rate
• Repeal the deduction for federal income taxes paid (this would take a vote of the people)
• Introduce “add-backs” into the income calculation (for more detail, see page 9 here)
• Retain franchise tax

Sales Tax

• Unify the state and local sales tax bases with exception of transactions of groceries, utilities and prescription drugs. Louisiana is one of very few states which allow state and local sales tax bases to be different, and this reform would address a huge complexity for businesses in the state.
• Increase state sales tax rate by 1 percent

This plan makes structural changes to each of the major taxes, and it would represent true tax reform. It broadens tax bases, lowers tax rates, and its hallmark feature is a flat tax with a zero bracket, a structure that has beneficial elements for both sides of the legislative aisle.

The table below shows Louisiana’s State Business Tax Climate Index ranking under current law, then with the plan as proposed, and then in the far right column I’ve also listed what the state ranking would get to if groceries, utilities, and prescription drugs were brought fully into uniformity between the state and local sales tax bases. This isn’t in the Stokes Plan, but will be useful to think about for future reform.

Projected Ranking Changes in the Tax Foundation State Business Tax Climate Index

The reforms listed here would be some of the largest we’ve seen in any state in the last decade, and would be starting building blocks toward a more stable, equitable, competitive tax system for the state. Improving 11 rankings from 37th to 26th in just one session is sizable, and I don’t recall ever seeing a revenue-positive plan perform so well on our Index. We'll update here as more tax provisions advance in Louisiana.

Be sure to read our full book on Louisiana’s tax system here.

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