Thread by @TaxFoundation

Deliberations which began well before the beginning of Louisiana’s legislative session have yielded a meaningful package of tax reform proposals.

taxfoundation.org/louisiana-tax-… @janellecamm #laleg

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 currently ranks 42nd on our State Business Tax Climate Index, which measures tax structure—the how rather than the how much.

statetaxindex.org/state/louisiana

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:

Louisiana lawmakers will be considering a range of tax reform bills, but the primary effort has been spearheaded by Sen. Allain (R) and Rep. 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. The Centralized Sales and Use Tax Administration Study Group has worked to create a system that consolidates collections/administration at state level (vs local collections at 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% 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, LA 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 COVID-19, lawmakers temporarily suspended part of Corporation Franchise Tax by exempting first $300k of taxable capital, and SB 161 would extend that partial exclusion until tax year 2026, when HB 279 will have fully phased it out 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 corporate income tax while granting the legislature discretion on the deduction under 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% starting in tax year 2023.

Such a decrease would give LA lower rates than neighboring Arkansas, while still surpassing Mississippi's 5% top rate and lack of a conventional corporate income tax in TX.

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

While many of these Louisiana tax 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 capital stock tax, this would represent a marked improvement in LA’s tax climate, eliminating several uncompetitive features of the current code.