In a recent joint meeting of Louisiana’s House Ways and Means Committee and the Senate Revenue and Fiscal Affairs Committee, Richard Nelson, the Secretary of the Department of Revenue appointed by Governor Jeff Landry, delivered a critical presentation on Louisiana’s fiscal landscape and the urgent need for tax reform. He revealed the state’s economic challenges and potential solutions that would foster a sustainable economic environment.

Secretary Nelson and several lawmakers highlighted the adverse impact of existing tax policies on the state’s economic health. Louisiana is one of only three states imposing a corporate income tax, corporate franchise tax, and an inventory tax, which make the state uncompetitive. Additionally, the myriads of tax incentives on corporate and personal taxes create a complex and burdensome tax system. Consequently, the state has experienced five consecutive years of population loss, with nearly 120,000 residents leaving since 2016, equivalent to losing the smallest 13 parishes of the state or the entire population of Lafayette Parish. From 2020 to 2023 alone, 84,000 people, which is equivalent to the population of Lake Charles, migrated out of the state.

The troubling historical trajectory contrasts with Louisiana’s abundant natural resources and assets that should be the envy of the nation. It sadly proves that bad policies can cripple a state’s economic growth. A comparison of historical outmigration trends and tepid growth of the economy highlights the need for policy reforms that create growth.

Secretary Nelson recommended that lawmakers tackle these problems through comprehensive tax reform, including:

  • Simplify the tax structure: Simplifying the tax structure is a foundational step that many tax experts have long supported as a core feature of a solid tax plan. This includes eliminating many of Louisiana’s 564 various tax deductions, exclusions, and exemptions (known as incentives) found in state law. For the sales tax, eliminate or consolidate approximately 100 of the 220 exemptions and exclusions and expand the tax base to include taxing some services and digital goods, which would allow for a reduction in the overall rate. Additionally, eliminate nearly all of the 62 corporate income tax and 38 franchise tax incentives.
  • Reduce personal income taxes: The proposal includes a reduction of the individual income tax by creating one flat rate and increasing the standard deduction so that no taxpayers will see a tax increase, and all taxpayers will have a lower tax burden. This would simplify the filing process and potentially increase tax compliance. It would also place Louisiana in a more competitive posture, given that several states have recently moved or are in the process of phasing out their personal income tax.
  • Corporate Tax Reforms: The corporate income tax in Louisiana is currently the highest in the South, with a top tax rate of 7.5%. Secretary Nelson proposed to reduce and flatten the corporate income tax rate in exchange for the elimination of nearly all of the 62 tax incentives. He also proposed the elimination of the corporate franchise tax, which is a tax on the value of a company, rather than on its income. Louisiana franchise tax rates are among the highest of the 16 states that still impose it, and it punishes businesses that wish to grow in the state. Additional proposals include reforming the inventory tax, which only 14 states have and five only partially apply.

Because Louisiana’s temporary 0.45% sales tax increase approved by lawmakers in 2016 is set to expire at the end of this year, and because the state’s historical budgeting process relies on a “continuation” practice where all current spending is anticipated to continue, a deficit is anticipated next year. The temporary sales tax had been approved by lawmakers to give the state time to address budgetary issues and get the state’s fiscal house in order. Instead, over the past eight years, state lawmakers have added more state spending and dedicated more general tax revenue to specific purposes, making Louisiana’s fiscal challenges even worse.

In his presentation to the joint committee, Secretary Nelson likened tax reform to a Jenga puzzle, where taking out one piece could cause the entire structure to collapse. He emphasized the need for a holistic approach to ensure sustainable and successful reform and underscored the urgency of addressing Louisiana’s fiscal challenges. We at the Pelican Institute agree: Louisiana desperately needs a simpler, fairer tax system that reduces the burden on individuals and businesses, encourages population growth, and fosters economic development. But they must be coupled with spending restraint to avoid setting the stage for higher tax rates in the future, even as part of a sounder tax structure. That’s what’s needed to ensure these reforms pave the way to a sustainable fiscal future and don’t just serve as another short-term fix.