Tax reform: What’s the best path forward?
Louisiana’s 2023 Legislative Session marks several milestones. It is the last year of the governor’s maximum eight years (two consecutive terms) in office; the last year of the four-year legislative term in which nearly one-third of members are in their final year in office due to term limits; and it is the last session before elections for governor and the entire legislature. It is also an odd numbered year, marking this a fiscal session. Fiscal sessions are generally shorter in length and, unlike non-fiscal sessions, lawmakers can contemplate changes in tax policy. And with tax reform recently enacted in several other states, this year could be the year of significant tax reform in Louisiana.
Tax reform in Louisiana has been a topic of discussion for the last several years, and there are several compelling arguments for why it is necessary. Louisiana has one of the most complicated tax codes in the country. Simplifying the code would make it easier for individuals and businesses to understand their tax obligations, reduce compliance costs, and reduce financial burdens. This complexity is often cited as a barrier to attracting new businesses and investment to the state. A simpler, more competitive tax system could help make Louisiana a more attractive location for business and investment, which would create new jobs and economic growth.
And, of course, most taxpayers would love to see less of their hard-earned paychecks being withheld by the government as well, although there’s debate about which government-funded services and activities are needed and should be funded through taxes collected.
This is why many lawmakers have introduced a variety of bills aimed at simplifying the tax code and easing the burden on taxpayers in our state. A lot of time will be spent debating the various tax reform proposals in the legislature this year. And for certain, big change is needed. Now is the time to put in the work to figure out which of the various proposals will advance through the process and put Louisiana in the best position possible for economic competitiveness.
Taxes on Business
Louisiana has three main ways that it explicitly taxes business that are considered onerous or burdensome. The corporate income tax on the net profits of a business, the franchise tax on capital and the net worth of a business, and the inventory tax, which is a local government tax on the net worth of a business. Unlike the income tax, the franchise and inventory taxes are levied regardless of whether a business makes a profit and comes with a large compliance cost to both businesses and the government.
SB 1, HB 197, HB 214, HB 363, HB 364 and HB 387 all propose to repeal or phase out the corporate franchise tax.
Several proposals are on the table that change the corporate income tax, such as HB 146 to create a flat rate of 4%, while SB 9 would reduce the rates on corporate income tax while eliminating the tax credit for inventory taxes businesses pay to local governments. HB 214 and HB 363 eliminate and HB 246 phase out the corporate income tax and all its subsequent deductions, exemptions, and credits.
There are proposals relating to the inventory tax. SB 2 proposes to phase out the local tax in exchange for business concessions to the Industrial Tax Exemption Program (ITEP). Another option proposed is to eliminate the state inventory tax credit and reduce corporate income tax rates.
Taxes on Individuals
Louisiana also taxes the income of individuals using three rate categories: 1.8%, 3.5%, and 4.25%. Several proposals would alter that structure.
Like the tax structure established for businesses, some lawmakers are working within the system to help ease the burden on some taxpayers through the expansion or creation of new credits and deductions on the personal income tax. SB 10 would increase tax exemptions for deposits made into K-12 education savings accounts. Similarly, HB 32 would increase the amount of a tax deduction for parents who spend money on tuition, homeschooling, or other public school expenditures on their child’s K-12 education.
Other bills propose relief to a broader swath of taxpayers. Several propose flat income taxes where everyone pays the same rate. They vary widely with the rate, the amount of standard deduction, and other credits. HB 145 suggests a 4% rate, which is the same rate in another proposal for the corporate income tax. Other proposals are to shift to a 3.49% or 4.25% rate.
In addition to the flat-rate options, there are two proposals to eliminate the personal income tax altogether; one would eliminate it beginning next year, and there are two options to phase it out over a period of four or five years with lower rates each year.
In light of all the excess revenue the state is anticipating this year, one lawmaker is proposing to return a portion of taxpayer dollars to individual filers in the form of a rebate on their tax returns next year. The average rebate for a family of four would be $500.
Sales Taxes
Louisiana’s sales tax rate, currently at 9.55%, ties with Tennessee as the highest in the
nation. (However, unlike Louisiana, Tennessee does not have a personal income tax.) The rate includes 4.45% for the state and an average of 5% for local governments that charge differing rates.
Several bills propose to eliminate or phase out ahead of schedule the temporary sales tax of .45% that is already set to expire at the end of 2025.
Pelican applauds lawmakers for putting many thoughtful proposals on the table for consideration and for already engaging in productive conversations about how best to achieve meaningful reform. Whatever mix of bills are ultimately approved, lawmakers and the governor should ensure that they will bring relief to taxpayers and create economic growth for Louisiana. Tax reform has the potential to bring about significant economic and social benefits for the state. By simplifying the tax code, attracting new business and investment, and creating a less burdensome tax system for all involved, Louisiana can become a more prosperous state that will contribute to a life of flourishing for all its people.