Are you willing to give up a popular deduction on your state taxes in exchange for being assessed at lower income tax rates?
That’s the basic question voters will face in October under a measure given final passage Thursday by the Louisiana Legislature – and that still requires the signature of Gov. John Bel Edwards.
Under the proposed change, both corporations and individuals would be assessed at lower income tax rates in exchange for losing the right to deduct their federal tax payments on their state income tax returns.
Tax experts have long called for the swap, saying the lower tax rates will make Louisiana appear more attractive as a place to live and invest, while canceling the deductions will ensure greater stability for tax collections.
If Edwards gives his approval, voters will decide on Oct. 9 whether to approve the proposed change to the state constitution. At a press conference Thursday night, Edwards said he expects he will sign the measures but needs to study the last-minute changes first to make sure they are consistent with his goals for broadening the tax base, lowering rates and raising about as much in the future as today.
The House and Senate called for the election by passing a package of three bills that are linked together to create the constitutional amendment. Those bills are Senate Bill 159 by Sen. Bret Allain, R-Franklin; House Bill 278 by Rep. Stuart Bishop, R-Lafayette; and House Bill 292 by Rep. Neil Riser, R-Columbia. Allain has been the key driver behind the legislative package.
The proposed change will slightly reduce the amount of revenue that the state collects, according to a legislative analysis. Supporters of the proposal say that most taxpayers should pay about the same if the change goes through, although some may pay a bit more or less.
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The final package of bills, which won overwhelming support from lawmakers on Wednesday and Thursday, resulted from weeks of negotiations between legislators, outside interest groups and the governor’s office.
If voters approve the proposed amendment, tax rates set at different income levels in the constitution by voters in 2003 would be replaced by a maximum top rate of 4.75% for individuals and 7.5% for corporations. Those are lower than the top rates today.
If voters pass the amendment, the top individual income tax rate would drop from 6% to 4.25% on net income above $50,000, the 4% rate would drop to 3.5% on net income between $12,500 and $50,000 and the 2% rate would drop to 1.85% on net income on the first $12,500 of income.
“Louisiana will have the lowest upper-income bracket of the Southern states that apply an income tax,” said state Rep. Beau Beaullieu, R-New Iberia.
Tax experts have said eliminating the federal deductions will cost higher-income taxpayers a bit more on average.
The five different corporate tax rates under current law would drop from a high of 8% to 7.5% on income above $150,000 and to lower rates at lower income levels.
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The new rates would be set in statutory law, meaning the Legislature could change them in the future. For example, if the amendment passes, lawmakers could choose to raise the top 4.25% individual income tax rate up to the 4.75% rate set in the constitution. Rates set in the constitution are harder to change because doing so requires legislative and voter approval.
Sen. Karen Carter Peterson, D-New Orleans, joined with two other senators in opposing the proposed constitutional amendment. She expressed concern that voters could be locking in a top tax rate that’s not high enough to generate the revenue needed to provide all the government services the public wants.
Supporters of the tax swap say Louisiana is an outlier in allowing taxpayers to deduct their federal tax payments on their state taxes. Under current law, if Congress and President Joe Biden raise taxes – something Biden has said he plans to do – the state will wind up losing tax revenue because Louisiana taxpayers will take bigger federal tax deductions on their state tax returns.
The tax swap has the support of such groups as the Pelican Institute for Public Policy, the Public Affairs Research Council, the Louisiana Association of Business and Industry, GNO Inc. and the National Federation of Independent Business.
“This plan creates greater stability and predictability, lowers income tax rates, eliminates the punishing franchise tax for 85% of filers, and guarantees that growth of state income will be used to lower rates in coming years,” the Pelican Institute said in a statement. “The passage of this package of legislation sends a strong message that families and entrepreneurs can thrive in the Pelican state and sends an opportunity to voters this fall to wholeheartedly endorse major reforms to increase Louisiana’s global competitiveness.”
The ballot language that voters will see does not mention a provision that aims to ratchet down tax rates if tax collections and personal income growth are higher than expected and if the state rainy day fund is filled to a certain amount.
In January 2020, Republicans in the Louisiana House divided into two camps in a bitterly contested election to choose the next speaker.
Jan Moller, the director of the Louisiana Budget Project, had voiced support for parts of the tax package earlier in the session. But he ended up objecting to it because of the language added by conservatives that would mandate cuts in tax rates if those triggers were reached.
The Legislature also passed Senate Bill 161 by Allain that would reduce the franchise tax, a long-time goal of business interests.
Black Democrats overcame initial objections to the tax package after the House Republican leadership agreed to consider several of their initiatives, including a bill to provide a tax credit to companies that hire underprivileged youth (House Bill 680), a bill that extends the Earned Income Tax Credit for the working poor (House bill 678) and a sales tax exemption for the purchase of feminine hygiene products and diapers (House Bill 7). The Legislature passed all three measures on Thursday.
Supporters of the swap say the reduction in tax rates will lead to more investment and more tax revenue in Louisiana. But the Legislature and then-Gov. Bobby Jindal cut taxes for higher- income taxpayers in 2008, and the state faced years of budget deficits in the following years.