Pro-Growth Tax Reforms to Boost Competitiveness in Louisiana

My name is Manish Bhatt, and I am a senior policy analyst with the Center for State Tax Policy at the Tax Foundation, a nonpartisan and nonprofit tax research and policy organization. Founded in 1937, the Tax Foundation analyzes and tracks tax issues at the global, federal, and state levels and educates stakeholders on the principles of sound tax policy—simplicity, transparency, neutrality, and stability. I am honored to have the opportunity to appear before you today and answer your questions.

Louisiana’s tax code currently features a number of inefficient and uncompetitive policies that are leaving the state further and further behind. I am here to discuss state tax trends from around the country and reforms that could be adopted to improve the lives of current and future residents of this great state. These include the proposals announced by Governor Landry on October 1^st and others. Tax competition among the states is real, and Louisiana is competing regionally and nationally for capital investment and residents. Annually, the Tax Foundation publishes the State Business Tax Climate Index (Index), which compares and ranks each state’s tax structure and competitiveness. The Index is built using five components: individual income taxes, sales taxes, corporate income taxes, property taxes, and unemployment insurance taxes. Importantly, the components are not weighted equally. Those components with the greatest variability among the 50 states are assigned greater value. Some states forgo levying one (or more) of the major categories of taxation, such as the 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. , 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. , or the 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. . For this reason, more weight is assigned to these taxes in the Index. Conversely, every state code features property and unemployment insurance taxes. Therefore, these components receive the least weight.

A state can levy every major category of taxation and remain competitive, as evidenced by Utah and Indiana. Both rank within the top 10 of the Index, and their codes generally feature low rates and broad bases.

In the most recent Index, Louisiana’s tax code showed significant room for improvement. The state ranks 40^th overall, and only the property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. and unemployment insurance tax components feature in the top 25. However, in recent years, the legislature has pursued tax relief by reducing the franchise tax rate, eliminating the throwback rule, and reforming economic nexus for sellers with no physical presence in the state.

Louisiana, like New York and California, is a net out-migration state. My colleague, Andrey Yushkov, analyzed national data regarding migration trends within states and found that intrastate migration patterns are not homogenous. For example, in Texas, larger metropolitan areas gained residents and adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” , whereas more rural areas experienced out-migration. However, in Louisiana very few parishes experienced any gains, meaning the overwhelming majority of parishes suffered a loss of residents and adjusted gross income.

Taxes alone do not account for migration trends, but they can be part of the solution. Aligning closer to the principles of sound tax policy can help recruit and retain individuals and businesses alike.

National Trends

In recent years, many states enjoyed strong revenues and surpluses. Lawmakers used these additional funds to enact tax relief and increase competitiveness. Since 2021, 28 states have reduced individual income tax rates, and 15 have cut corporate tax rates. Several states, like Louisiana, did both. Many states adopted reforms and implemented rate relief in 2021 and 2022, and even in 2023, the trend continued strongly, with eight states enacting individual income tax rate reductions, while scheduled or triggered rate reductions took effect in seven additional states. The trend continued in 2024, with 34 states seeing notable tax changes taking effect on January 1, 2024, including 17 states cutting individual or corporate income taxes—or both, like Arkansas, Iowa, and Nebraska. Wyoming updated its economic nexus rules by removing the transactions threshold for marketplace facilitators and remote sellers beginning on July 1, 2024. And in some states, including Louisiana, there’s clearly still work to be done—and a desire to get it done.

Another notable trend is the number of states that have either moved to a flat individual income tax or are in the process of doing so. In July 2021, Arizona began phasing in a flat rate of 2.5 percent using tax triggers that made the timing of the transition subject to revenue availability. Per comprehensive tax reform enacted in 2022, Iowa is phasing in a single rate of 3.9 percent by 2026. Mississippi’s 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. took effect in 2023. The rate was initially set at 5 percent but later reduced to 4.7 percent and is scheduled to decrease to 4.4 percent in 2025 and 4.0 percent in 2026. Georgia’s flat tax was enacted in 2022 and took effect in 2024. Here, too, the rate was first set at 5.49 percent, but the legislature further reduced it to 5.39 percent, retroactively. In a 2022 special session, Idaho adopted a flat rate of 5.8 percent, effective in 2023.

Single-rate taxes introduce simplicity into the tax code, but there are other benefits. Revenue forecasting is easier under a flat tax structure. Moreover, taxpayers are better able to estimate their tax liabilities and how they would change under different levels of income. This adds meaningful transparency compared to codes featuring graduated rates. This is true not only for individuals, but also for businesses in states with a single rate corporate income tax, like Pennsylvania. As an important practical consideration, it also tends to be harder to raise the rates of single-rate taxes, and easier to cut them as revenues allow. It’s not impossible to raise the rate of a flat tax, of course, nor should it be—but particularly if a flat-rate structure is ultimately enshrined in the state constitution, this tends to restrain future efforts to impose high rates. It’s probably the only reason, for instance, that Illinois—a high-tax state in most regards, but with a constitutionally imposed, single-rate income tax system—has kept its individual income tax rate below 5 percent.

Additional reform efforts have included structural enhancements to grow competitiveness and efficiency. With uncertainty surrounding the future of the favorable tax provisions contained in the federal Tax Cuts and Jobs Act, Oklahoma and Mississippi decoupled from the Internal Revenue Code and enacted permanent full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. . This permits businesses in the state to immediately deduct the full cost of a qualifying expense, allowing investments to become profitable in year one rather than employing complicated depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. schedules.

Louisiana, Indiana, South Dakota, and Wyoming recently removed the transactions threshold from their economic nexus rules, and Utah considered a similar measure. Reforming economic nexus to only include a sales threshold is sound tax policy because it prevents small sellers with no physical presence in the state from being unduly burdened by the high cost of sales tax compliance when the dollar amount of sales in the state remains relatively low.

Evaluating the Proposed Reforms

Individual Income Taxes

Transitioning Louisiana’s tax code from the current graduated-rate income tax to a single rate is sound tax policy. As I mentioned, this adds both simplicity and transparency to the tax code. It also sends a message to both individuals and businesses that the state is serious about maintaining a competitive tax code and provides greater certainty that it will remain that way. Currently, Louisiana’s 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. are not indexed for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. . This causes bracket creepBracket creep occurs when inflation pushes taxpayers into higher income tax brackets or reduces the value of credits, deductions, and exemptions. Bracket creep results in an increase in income taxes without an increase in real income. Many tax provisions—both at the federal and state level—are adjusted for inflation. , which occurs when inflation pushes a taxpayer from a lower bracket to a higher one when nominal income rises, but real income does not or may even decline. Moving to a single rate avoids this pitfall. The standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. is also not indexed for inflation. Doing so would be a positive development.

Louisiana should also reconsider the current treatment of S corporations. Currently, Louisiana does not recognize S corporationAn S corporation is a business entity which elects to pass business income and losses through to its shareholders. The shareholders are then responsible for paying individual income taxes on this income. Unlike subchapter C corporations, an S corporation (S corp) is not subject to the corporate income tax (CIT). status, requiring these entities to file taxes as C corporations rather than the pass-through status accorded to them in other states. This is inefficient and uncompetitive and should be reformed.

Corporate Income Taxes

The proposed corporate tax reforms represent pro-growth and competitive tax policy. Transitioning to a single rate offers the same benefits seen with a single-rate individual income tax. Moreover, removing incentives introduces greater neutrality into the tax code, benefiting all corporate taxpayers in the state. Generally, incentives that target or favor particular investments or industries are economically inefficient and nonneutral. Moreover, these incentives often remain on the books for long periods of time along with rules that reflect economic and legislative priorities and expectations of policymakers at a defined moment in time—which can prove particularly distortionary if still in place decades later. Repealing longstanding incentives is not a march away from stability, but an intentional action to make the code more neutral to the benefit of all corporate taxpayers.

Adopting permanent full expensing would lift Louisiana’s regional and national competitiveness and a signal to the market that Louisiana is, indeed, “open for business.”

Sales Taxes

While Louisiana has made improvements to the sales tax code, it still lacks uniform sales tax administration. This affects sellers in the state but disproportionately impacts remote sellers and marketplace facilitators who may be required to collect and remit sales taxes despite having no physical presence in Louisiana. To be clear, there has been progress in recent years, but the fact remains that remote sellers and marketplace facilitators are subject to burdensome compliance obligations that disproportionately impact small and midsized businesses. When these sellers must collect and remit sales taxes parish by parish, many are left with greater compliance bills than revenue generated. Understanding the historical and present importance of local control, it is entirely possible that revenue collections increase when compliance burdens are lessened, making the case for centralized sales tax collection particularly important for Louisiana’s competitiveness and fiscal health.

Further, a range of business inputs are subject to sales taxes, and the state has among the highest average local option sales tax (5.1 percent). At 9.55 percent, Louisiana is tied with Tennessee for the highest combined state and average local sales tax rate.

Expanding the exemption for farm equipment, a business input, would represent sound tax policy and alleviate tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. . Additionally, better alignment between the state and local 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. would reduce complexity. Broadening the base to include more personal services could allow for consideration of a lower statewide rate.

Removing the transactions threshold for economic nexus remains a competitive reform. Should centralized administration be possible in the future, the state would see further improvements in the sales tax ranking.

Property Taxes

The effective tax rate on owner-occupied property in Louisiana is .51 percent, which is among the lowest in the country with a national average of .91 percent and a high of 2.08 percent in New Jersey. Similarly, at 1.89 percent, Louisiana boasts relatively low property taxes as a percentage of personal income. Compared to Connecticut (4.07 percent), New Jersey (4.76 percent), and Texas (3.86 percent), Louisiana is competitive in this regard. Nevertheless, Louisiana’s property tax ranking suffers due to the imposition of both the franchise tax (a capital stock tax) and the inventory tax. Both taxes are inefficient and are levied regardless of profitability.

The franchise tax is imposed on a business’s net worth and penalizes investment in the state. Taxing inventory disproportionately impacts businesses with larger inventories and causes taxpayers to make inefficient timing and location decisions with their inventory. In 2023, the legislature successfully passed legislation that would have phased down the franchise tax, provided certain revenue targets were met. Tied to this phasedown, a bill was passed to reduce the rebate rate under the Quality Jobs Program for each year that the franchise tax reduction is triggered, alleviating concerns regarding lost revenue resulting from the franchise tax phaseout. Despite passing both chambers, the administration at the time vetoed the legislation while acknowledging that the franchise tax is “antiquated and should be structurally reformed or repealed.” During the same session, the inventory tax was considered for repeal, but the attempt was ultimately unsuccessful.

Repealing each of these taxes, in addition to the competitive corporate tax reforms under consideration, would be a dramatic boost to the state’s competitiveness.

Competitive Gains

If Louisiana enacts comprehensive tax reform, the state will increase its competitiveness and cultivate a pro-growth environment. Had the reforms under consideration been in place at the time of our previous Index, the state could have ranked in the top 10 rather than the bottom 10, with significant gains in most components. Our Index rankings are based on the structure of each state’s tax code, and I cannot predict what other states will attempt in a future legislative session. Nevertheless, looking at the Index and comparing Louisiana’s current rankings to what they could have been is directionally instructive. Sound, pro-growth reforms yield better outcomes for the state and taxpayers, and this is reflected in our Index.

Tax reform is complicated and difficult. I applaud this body and the administration’s efforts to provide meaningful relief to Louisiana taxpayers that could also help recruit and retain individuals and businesses.

Thank you for the opportunity to appear before this committee, and I look forward to your questions.