Legislature Passes Major Tax Reforms
November 25, 2024
CABL Commentary
It was a shorter session than many expected, the administration’s tax proposal underwent some significant changes during the legislative process, but on the whole lawmakers approved a fiscal reform plan that makes major improvements in the state’s tax structure.
The reductions in the state personal and corporate income tax rates and elimination of the franchise tax will do much to make Louisiana’s tax structure more competitive and position the state as a desirable place for businesses and people to invest and live.
In reducing the individual income tax to a flat rate of 3%, Louisiana’s rate will be among the lowest in the country and the lowest in the South of states that levy an income tax. That impact is further enhanced by the fact that the standard deduction for individuals is almost tripled, the exemption for senior citizens is doubled, and those at lower income tax levels will pay no income tax at all.
On the corporate side, the changes are a definite improvement, though not quite as profound. Louisiana’s corporate income tax will change from a tiered system with a top rate of 7.5% to a flat rate of 5.5%. That would generally put Louisiana in the middle of the pack of Southern states with a corporate income tax. That position is bolstered by the elimination of the corporate franchise tax, a levy that is widely seen as antiquated and a disincentive for corporations to invest.
Despite the major reductions in income tax rates, lawmakers say the tax package as a whole is generally revenue neutral for the state. That’s because it largely pays for the cuts through an increase in state sales taxes. The current state rate is 4.45% and was slated to go down to 4% at the end of the fiscal year. This legislation increases the rate to 5%. It also extends the state sales tax to include more digital products such as entertainment downloads and subscriptions to streaming services.
If there is a downside to the legislation in this package it is that Louisiana’s already highestin-nation combined state and local sales tax rate will go even higher. The legislation does
call for a slight reduction from 5% to 4.75% in 2030, but that is still higher than what people are paying now.
The package also does several other things of significance:
• It pays down about $2 billion in debt to the teachers’ retirement system and uses the savings to fund a permanent $2,000 pay raise for teachers. Because lawmakers couldn’t find recurring funding earlier, they have been providing teachers a temporary pay stipend for the last two years.
• It retains three tax credits that received a good deal of attention during the session: movie, historic restoration, and R&D. All three are capped at lower levels than what was previously authorized.
• It moves several property tax exemptions from the constitution into state statute where they more appropriately belong. It continues to protect them, though, by requiring a vote of three-fourths of the Legislature to change. The Homestead Exemption remains in the constitution along with a couple of other exemptions important to lawmakers.
• It eliminates one of two “savings accounts” the state currently has and makes changes to the surviving account, the Budget Stabilization Fund (Rainy Day Fund).
• It rewrites, updates, and streamlines Article VII of the constitution which deals with a broad variety of state fiscal policies.
Finalizing the teacher pay raise and several of the other changes require voter approval of that constitutional rewrite of Article VII. The changes in sales and income tax do not.
So where do we stand? From CABL’s perspective the original proposal from the administration was a well-thought out package of policy changes aligned with many of CABL’s long-held principles of tax reform. It simplified the tax structure, added transparency, lowered income tax rates, and largely paid for it by broadening the sales tax base.
The version lawmakers approved diminished some of the reform elements of the proposal, primarily by raising the sales tax rate, maintaining exemptions, and keeping some of the tax credits. But clearly, there were political concerns about some of those proposed changes and lawmakers responded to what they heard from constituents.
Questions still remain about the exact impact of this plan on the budget. Lawmakers have said it is generally revenue neutral, which probably means not all of the tax changes are fully paid for, but whatever shortfall might remain will be manageable. That will have to be more fully sorted out.
But on the whole, the passage of this legislation will improve Louisiana’s tax structure. It will move us up significantly (we are told) in the tax climate rankings from the Tax Foundation, give us one of the lowest individual income tax rates in the country, and make the state’s corporate tax structure significantly more competitive than it was. All of those are major accomplishments.
It is our hope that lawmakers will leave the Capitol enjoying their success in step one of their tax reform efforts, but acknowledging that with the highest sales tax rate in the country, a step two remains.