Tax-swap is now left to Louisiana voters as John Bel Edwards signs legislation

Gov. John Bel Edwards on Monday signed the tax-swap package of bills that, if approved by Louisiana voters, will repeal the federal tax payment deduction allowed on state income tax returns in exchange for lower state tax rates for individuals and corporations. The legislation will only take effect if residents vote in favor of a proposed constitutional amendment on Oct. 9.

The proposed constitutional amendment would remove Louisiana’s three individual income tax brackets that are present in the state constitution and lower the maximum allowable tax rate from 6% to 4.75%.

Currently, the constitution requires a deduction of federal taxes paid for purposes of computing state tax returns. Legislators and 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 increases taxes under President Joe Biden.

The proposed constitutional amendment would allow — rather than require — such a deduction. If voters approve that amendment, it will prompt the tax-swap repeal of the deduction and usher in the reduced income tax rates and other so-called “tax reform” provisions included in the bills signed by Edwards on Monday.

Louisiana’s new individual income tax rates would be 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 legislation would also enact tax-cut triggers that 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. Such triggers go against the advice of the Louisiana Budget Project.

Louisiana’s new corporate tax structure 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.

Furthermore, the legislation includes the following changes to the state’s corporate franchise tax:

• Extends the suspension of the first tier of the franchise tax for small business corporations to July 1, 2023.
• Permanently eliminates the first bracket of the franchise tax and provides that no tax will be due on the first $300,000 of taxable capital for all taxpayers beginning Jan. 1, 2023
• Reduces the rate on taxable capital in excess of $300,000 from 3% to 2.75%.
• Enacts a tax-cut trigger that will further reduce the franchise tax rate automatically if certain tax revenue growth targets are met.

Voters will see the following constitutional amendment question on the ballot for the Oct. 9 election, which will also include the open mayoral primaries for New Orleans residents:

“Do you support an amendment to lower the maximum allowable rate of individual income tax and to authorize the legislature to provide by law for a deduction for federal income taxes paid?”