The deliberations, which began long before the beginning of Louisiana’s legislature – which is the latest in the country, April 12 – has produced a significant package of tax reform proposals. Legislators are aiming to lower the state’s individual and corporate tax rates, phased out capital stock tax, and bring sales tax centralization through the finish line to the end – all goals that would improve Pelican state tax law. They are also considering abolishing inventory tax, which is currently being lowered by state tax credits, which will not remove liability for all businesses.
Louisiana ranks 42nd on our State Business Tax Climate Index, which measures tax structure – more how than how. If implemented separately, each of the proposed major changes would raise that total to 40th, cutting Louisiana (barely) off the bottom 10. If all of the proposed changes were implemented, Louisiana would improve to 34th place. The proposed changes are:
- Lowering individual income tax rates;
- Introduction of a flat corporate income tax of 6 percent;
- Abolition of the corporate concession tax;
- Removal of inventory from property tax base; and
- Centralization of VAT collection
Louisiana legislature will be considering a number of tax reform bills, but the main effort has been spearheaded by Senators Brett Allain (R) and Rep. Stuart Bishop (R) who have facilitated discussions on improving state tax law and raising support for it their political priorities. The plan in question aims for revenue-neutral changes that will further improve the country’s competitiveness. Since the fiscal governance plan contains many moving parts, it is worthwhile to outline the many component calculations.
Louisiana has long had one of the most complicated sales tax systems in the country, and the Centralized Sales and Use Tax Administration study group has worked to create a system that consolidates collections and administration at the state level rather than leaving local collections to individual communities. House Bill 199, which both houses passed, would set up the State and Local Streamlined Sales and Use Tax Commission to further this goal and put consolidation on the ballot that requires a simple majority to pass.
Senate Bill 159 allows lawmakers to abolish federal income tax deductibility for both individual and corporate taxes, and is working with HB 278 to lower individual income tax rates by removing the deduction for federal taxes paid. Since the withdrawal is anchored in the state constitution, a constitutional amendment is required to lift it. The proposed change also places a 5 percent cap on income tax rates. HB 278 sets a new individual income tax rate plan that maintains the current number of tax rates, but lowers the rates from 2, 4 and 6 percent to 1.85, 3.51 and 4.25 percent in the 2023 tax year.
The federal deductibility treatment is important for a number of reasons. The deduction means that Louisiana’s “sticker rate” is significantly higher than it would otherwise be the case. By eliminating federal deductibility, Louisiana can lower its rates to look as competitive as ever. Additionally, tying a deduction to federal liability means that Louisiana tax law acts as a mirror of federal law – what is preferred on the federal side is penalized on the state side, and vice versa. This means that when taxpayers take advantage of child discounts, business expense deductions, or anything that reduces federal tax liability, their state income tax liability increases. It also created uncertainty among individuals whose return eligible them for additional coronavirus discounts on top of those originally received.
HB 279 would phase out the state’s antiquated corporate franchise tax – also known as capital stock tax – between tax years 2023 and 2026, reducing liabilities by 20 percentage points each year. Louisiana is one of only 16 states that levy such a tax. In recent years, many states have gradually phased out capital stock taxes, although the New York tax, which was expiring, was extended for another year as part of a larger tax increase package passed earlier this month. Since they fall on a company’s net worth, capital stock taxes can be particularly damaging during times of economic downturn as they are levied independently of profits. In response to the coronavirus crisis, Louisiana lawmakers temporarily suspended part of the Corporation Franchise Tax by exempting the first $ 300,000 of taxable capital, and SB 161 would extend that partial exclusion through tax year 2026 if HB 279 All businesses will have abolished the tax entirely, if enacted.
Louisiana is one of nine states that have full corporate inventory taxation (called ad valorem tax), but among those nine, Louisiana is unique in that it reimburses companies for inventory tax payments. This essentially creates an atypical system of revenue sharing between states and municipalities that creates time problems for businesses unable to take full advantage of the offsetting tax credits that are non-refundable. SB 158 eliminates the middleman – and liability for some businesses – by phasing out value tax between tax years 2023 and 2026, with 25 percent of the assessed value being exempted each year. To ensure that the municipalities continue to receive the funds they need, the state will set up an additional revenue-sharing fund to distribute funds, first based on the population of the municipalities, and then within each municipality based on their past ad valorem tax revenues.
Earlier discussions of this group of legislators also dealt with the 8 percent corporation tax, which also offers federal deductibility. Several different bills address this issue, but there is some overlap that may need to be addressed.
HB 274, another constitutional amendment, allows corporation tax rates to be set independently of individual income tax rates, but retains the deductibility of the federal government for corporation tax, while the legislature allows discretion in the context of individual income tax deductions. HB 292, which recently passed the House of Representatives and is now pending in the Senate, would then make the legal adjustment by removing federal corporate deductibility. HB 293, which is also being negotiated before the Senate, would set a flat rate of 6 percent from tax year 2023. Such a cut would give the state lower tax rates than neighboring Arkansas while still beating the 5 percent maximum in Mississippi and the lack of a conventional corporate tax in Texas.
Separately, Rep. Neil Riser (R) introduced HB 275, a constitutional amendment that removes the federal corporate tax deduction mandate. It does so, however, by adding the word “individual” to the constitution, which solidifies the deduction for individual income taxes rather than paving the way for its future abolition.
While many of these bills work together, some conflicts remain for lawmakers to resolve. If lawmakers were able to remove federal deductibility, lower income tax rates, end the work on inventory taxation, and phase out capital stock tax, it would mean a significant improvement in the state’s tax climate and some of the most anti-competitive features of the current one Code.
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