Tax swap package heads to Louisiana voters and Gov. Edwards

Louisiana voters will get to choose this fall whether they want to give up their ability to deduct their federal income tax bills from their state income taxes in exchange for a lower state tax rate. The Louisiana Legislature approved a proposed constitutional amendment Thursday that will be placed on the Oct. 9 ballot. If the legislature’s entire tax reform package becomes law, then it will include a similar swap for corporations.  

Senate Bill 159, sponsored by Sen. Bret Allain (R-Franklin), is the proposed constitutional amendment, which would remove the three individual income tax brackets that are present in the state constitution and lower the maximum allowable rate from 6% to 4.75%. Speaking on the Senate floor Thursday, Allain said the constitutional amendment would also allow for the enactment of legislation to change the state’s corporate tax structure.

Currently, the constitution requires a deduction of federal taxes paid for purposes of computing state tax returns. Tax policy experts have pointed out that the current law tying Louisiana’s revenue to federal tax rates creates revenue volatility out of state lawmakers’ control. 

When federal rates are high, Louisiana taxpayers deduct more from their state returns, leading to less for the state. The opposite occurs when federal rates are low; the state gets more revenue. With federal tax rates often changing with every new president, lawmakers fear they will face budgetary problems if Congress, under President Joe Biden, increases taxes. 

The proposed constitutional amendment would allow rather than require such a deduction. If voters approve that amendment, it will allow lawmakers to repeal the deduction and lower income tax rates.

HB 278, sponsored by Rep. Stuart Bishop (R-Lafayette), would take advantage of the new constitutional language allowing lawmakers to repeal the deduction of federal taxes. In exchange, the bill would lower Louisiana’s individual income tax rates as follows:

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

The bill would also enact automatic tax-cut triggers 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. 

According to the Louisiana Budget Project, a nonprofit that advocates for poor and working-class families, the tax reform package would mostly benefit wealthy individuals and corporations. Jan Moller, the organization’s executive director, shared his concerns over the tax-cut triggers while testifying at the Senate Revenue and Fiscal Affairs Committee. 

Such triggers can cause the same kind of problem caused by the constitutionally-set rates and deductions that the bill proposes to get rid of. Moller said they blindly decrease tax revenue for future budget periods without taking into account other factors such as liabilities or expenses the state might have due to unforeseen events. 

By enacting triggers, Sen. Karen Carter Peterson said during that committee hearing, lawmakers are spending the revenue of future budgets. Peterson voted against the bill and the constitutional amendment on Thursday, saying it is “bad policy” to put a tax rate cap (4.25%) in the constitution because it would require another constitutional amendment if the state needs to increase that rate.

Defending the cap, Allain said it is a necessary incentive for voters to approve the amendment and give up their deduction.

HB 292, sponsored by Rep. Neil Riser (R-Columbia) similarly would repeal the deduction of federal taxes paid on state returns for corporations. In exchange, it offers fewer corporate tax brackets with lower rates. 

The bill would condense Louisiana’s current five corporate tax brackets to only three brackets with rates as follows:

• 3.5% on the first $50,000 of La. taxable income.
• 5.5% on La. taxable income above $50,000 but not in excess of $150,000.
• 7.5% on all La. taxable income in excess of $150,000.

Lawmakers had numerous tax reform bills to choose from — some that gave large breaks to the wealthy and others that benefited the poor or middle class. A novel idea by Rep. Barry Ivey (R-Central) offered a flat tax rate of 4.25% while also lowering the income tax burden on the poor with a $25,000 standard deduction — meaning a head of household who earns no more than $25,000 a year would pay no state income tax. Although his bill made it out of committee, Ivey said legislative leaders seemed set on backing the proposals by Allain, who chairs the Senate Revenue and Fiscal Affairs Committee, and Bishop, who chairs the House Ways and Means Committee.

The legislature also approved Senate Bill 161, which would make the following changes to the corporate franchise tax:

• Changes the sunset date of the suspension of the first tier of the tax for small business corporations to July 1, 2023.
• Permanently eliminates the tax on the first $300,000 of taxable capital for all taxpayers beginning Jan. 1, 2023.
• Reduces the rate of tax on taxable capital in excess of $300,000 from 3% to 2.75%.
• Includes a rate reduction trigger that will further reduce the franchise tax rate if certain tax revenue growth targets are met.

Senate Bill 161, along with House Bills 278 and 292, head to the governor for consideration.