A complicated tax swap that would eliminate a popular deduction in exchange for lowering income tax rates passed its first step when it won approval from a Louisiana Senate committee Tuesday. But it still has a long road to travel before it can become law, which would ultimately require a vote by the people.
Senate Bill 159, approved by the Senate Revenue & Fiscal Affairs Committee, is part of a package of bills sought by the legislative leadership that would no longer allow individuals and corporations to subtract their federal income tax payments on their state income tax returns. In exchange, individuals and corporations would be assessed lower tax rates.
The changes would require a two-step process to become law. First, state legislators would have to approve the package of bills during the current legislative session. Then voters would have to give a thumbs-up in November 2022 to changing the tax rates enshrined in the state Constitution.
Under the legislation, the federal individual and corporate income tax deductions would disappear only if voters approved changing their tax rates.
Supporters of the proposals say the final result would be revenue-neutral, meaning that the government would collect as much as it does today, and most taxpayers would pay no more or less if the changes take place.
Daniel Erspamer, chief executive officer of the right-leaning Pelican Institute for Public Policy, based in New Orleans, said the plan to lower the top individual income tax rate would make Louisiana a more attractive place to live and invest.
Robert Travis Scott, president of the centrist Public Affairs Research Council of Louisiana, a Baton Rouge-based think tank, noted that Louisiana is only one of two states that allow the full federal tax payment to be deducted on state taxes.
Scott displayed a series of slides showing how Louisiana’s top nominal tax rates are higher than those in neighboring states, although he noted that Louisiana’s top rate actually has less of a bite because it kicks in at a higher income level than in many other states.
Jan Moller, the executive director of the left-leaning Louisiana Budget Project advocacy group in Baton Rouge, was the only person who raised concerns about SB159. He told the committee that while he supported reducing tax rates along with eliminating the federal deduction, he would rather the changes produce a more progressive system and raise more money for such priorities as early childhood education.
Moller pointed out that Louisiana has a regressive system today, where poor people pay a higher percentage of their income in taxes than do the wealthy. That’s because Louisiana depends so heavily on sales taxes.
The effort to revamp the tax system is being pushed by state Sen. Bret Allain, R-Franklin, and state Rep. Stuart Bishop, R-Lafayette. They are well-placed to lead the charge because they chair the tax-writing committee in their respective chambers. Allain chairs the Revenue & Fiscal Affairs Committee while Bishop chairs the House Ways and Means Committee.
“We’re getting rid of bad tax policy,” Allain said in an interview, adding that the changes would raise Louisiana’s ranking as a place to do business by such entities as The Tax Foundation, which is based in Washington, D.C.
Allain also said the elimination of the federal deduction would mean that income tax changes passed by Congress would no longer automatically increase or decrease Louisiana tax collections. The massive tax cut Congress passed during President Donald Trump’s term in office has had the surprising effect of boosting tax revenue in Louisiana, because people were not able to write off as much.
Gov. John Bel Edwards tried to undertake similar changes during his first term – the changes were recommended by a blue-ribbon committee that met throughout 2016 – but his proposals died repeatedly, either on the House floor or in the Ways and Means Committee, which then had a different chairman, then-state Rep. Neil Abramson, D-New Orleans.
The Legislature did approve a constitutional change in 2016 that would eliminate the federal tax deduction for corporations while reducing their tax rate – then-state Rep. Walt Leger III, D-New Orleans, was the sponsor – but voters rejected the swap that fall, with only 44% supporting it.
A linchpin of the Allain-Bishop plan – eliminating the federal tax deduction for both individuals and corporations – would raise the state about $850 million per year.
Their plan would offset that increase by reducing the top individual tax rate from 6% to 4.25%, the 4% rate to 3.51% and the 2% rate to 1.85%. The changes would be carried out by Bishop’s House Bills 278 and 274.
State Rep. Neil Riser, R-Columbia, who spent 12 years in the Senate on the Revenue & Fiscal Affairs Committee, is sponsoring the legislation that would collapse the corporate tax rate to a flat 6% from the current rates of 4 to 8% – in exchange for eliminating the federal income tax deduction for corporations. Riser’s measures are House Bills 275, 292 and 293 and will be heard by Ways and Means on Wednesday.
Allain said the new individual and corporate rates came from Edwards’ Revenue Department and are designed to make the changes revenue-neutral and to ensure that most everyone pays about as much as they do now.