Louisiana’s tax reform would reduce tax rates and enact triggers for future tax cuts

A tax reform package that has already cleared the Louisiana House advanced out of the Senate Revenue and Fiscal Affairs Committee Monday proposing to reduce individual income tax rates while repealing deductions for federal taxes paid and enacting triggers for future tax cuts.

House Bill 278, co-authored by Sen. Bret Allain and Rep. Stuart Bishop, passed the committee in a 8-1 vote with Sen. Karen Carter Peterson (D-New Orleans) objecting. It is the statutory version of individual income tax reform and was passed along with its companion legislation, House Bill 274, the proposed constitutional amendment that will allow lawmakers to enact their new tax policy. That bill was approved without objection.

The bill repeals excess itemized deductions and the federal income tax deduction currently allowed on state individual tax returns. Because Louisiana residents get to subtract what they pay in federal taxes from what they pay in state taxes, the more they  pay in federal taxes, the less they pay in state taxes and vice versa. Lawmakers expect getting rid of the deduction to make the state’s revenue more predictable.  

In exchange for losing those deductions, residents in each of Louisiana’s three tax brackets would see reduced state income tax rates:

1. From 2% to 1.85% on the first $12,500 of net income.
2. From 4% to 3.5% on the next $37,500 of net income.
3. From 6% to 4.25% on net income in excess of $50,000.

HB 278 also includes a tax cut trigger that would automatically reduce future tax rates if the state experiences economic growth at a certain threshold and if the state’s “rainy day” fund is at a certain balance, Allain said.

“In the constitution, there’s an assumed growth,” Allain said. “The state keeps the growth, but if there’s growth above that, a percentage of that growth can be taken to reduce the rates even further and can drive the rates down over time only if the economy is booming and it’s justified that we share in the boom of the state.”

Allain said the assumed constitutional growth rate is roughly 4% annually.

The tax cut trigger would have a 10-year sunset. 

Together Baton Rouge, a nonpartisan coalition of congregations and community-based organizations, and the Louisiana Budget Project, a nonprofit that advocates for poor and working families, both oppose the bill. Louisiana Budget Project Executive Director Jan Moller said he opposes solely the tax cut trigger because it prioritizes tax cuts for future budget cycles and not other needs that might be more pressing.

“(Tax cuts) get first dibs on any additional revenue that you have…not teacher pay, not early childhood education, not healthcare or whatever your other priorities may be in the budget,” Moller said. “We think tax cut triggers are fiscally irresponsible because they only look at one side of the ledger — the revenue side of the ledger — not the demand for services which change year after year. You don’t know how many people need Medicaid or need public assistance or education. You don’t know how many kids are going to be in school in a given year and what that’s going to cost. So it only looks at one side of the ledger, and it doesn’t account for unpredictable events.” 

Like Moller, Sen. Peterson, who cast the lone vote against the bill, said she was also opposed to the tax cut trigger, which she likened to spending money the state doesn’t yet have.

“It’s really spending,” Peterson said. “We’re doing tax policy, but we’re also spending for future budgets.”

Allain pushed back, pointing out that the state would still capture the first 4% of any growth. 

“If I had a business where someone came in and guaranteed me a 4% growth every year, I would take that,” Allain said. “That’s a good deal in business. I think it’s a good deal for the state…We will have made a lot more money in that first 4% and only sharing a small percentage above. I think it’s worth it to us.”

The senators met on Memorial Day because they are trying to advance these and other tax reform bills as quickly as possible to get them on the governor’s desk by early next week, Allain said. The legislative session ends Thursday, June 10 at 6 p.m..