A complicated tax swap supported by the legislative leadership passed an important step Monday when it won approval from the state House Ways and Means Committee.
House Bills 274 and 278 would eliminate a popular tax break that allows individuals to deduct their federal tax payment on their state income tax return while reducing income tax rates. Most people would pay about the same amount of tax, and the state would collect about the same amount of revenue, said the bills’ sponsors, state Rep. Stuart Bishop, R-Lafayette, who is working with state Sen. Bret Allain, R-Franklin.
Ways and Means also approved a different proposal that would eliminate the federal tax deduction and establish a flat 4% tax rate on taxable income above $12,500 for individuals and $25,000 for joint filers. The sponsor of House Bills 171 and 207 is state Rep. Jerome Zeringue, the Houma Republican who chairs the House Appropriations Committee.
Committee members, however, rejected a different measure that would have raised taxes on people who earn at least $500,000 per year. The sponsor of House Bill 529 is state Rep. Mandie Landry, D-New Orleans.
Amidst the competing proposals, state Rep. Buddy Mincey, R-Denham Springs, asked for guidance on which one was the best.
The one that “has the name of two chairmen on it,” said Bishop.
He was referring to the bills sponsored by him and Allain, and his answer also applied to Zeringue’s efforts. Bishop chairs Ways and Means while Allain chairs the Senate tax-writing committee, Revenue & Fiscal Affairs. Zeringue chairs the Appropriations Committee, which writes the House’s version of the budget.
Meanwhile, Landry is a freshman Democrat who frequently challenges the Republican leadership. Besides, in recent years, Republicans have consistently rejected income tax increases on higher income people.
The Bishop and Zeringue measures now advance to the House floor. An Allain bill that is a companion to Bishop’s bills is scheduled to be heard on the Senate floor Tuesday.
To become law, all of the bills have to pass both chambers, not be vetoed by Gov. John Bel Edwards and win voter approval in a statewide referendum either in October 2021 or October 2022.
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The effort to carry out the tax swap has the support of outside groups from the left, the center and the right, and it has the support of Edwards as long as it’s revenue neutral.
Robert Travis Scott, president of the centrist Public Affairs Research Council, a Baton Rouge think tank, brought a stack of past studies by experts dating to 2013. Each one recommended that lawmakers eliminate the federal tax deduction and offset that with a reduction in tax rates.
He and Allain said that Louisiana has a higher top tax rate than neighboring states and that that discourages investors from coming to Louisiana.
Under the Bishop-Allain bill, the 6% tax rate would drop to 4.25% on net income above $50,000, the 4% rate would drop to 3.51% on net income between $12,500 and $50,000 and the 2% rate would drop to 1.85% on net income the first $12,500 of income.
Allain said tax rates would drop more in the top bracket because the loss of the federal income tax deduction and other kinds of tax deductions – but not those for medical expenses – are taken more by upper income taxpayers.
Allain said a key reason to push the bill is that outside groups such as The Tax Foundation give Louisiana a low ranking in its state-by-state rankings. He noted that Louisiana ranks 42nd in the foundation’s “State Tax Business Climate Index.”
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Allain didn’t note that Louisiana actually ranks in the mid-30s on corporate (35) and individual income taxes (32) and that what sinks Louisiana is that it ranks 49th in sales taxes – both because its average 9.52% combined local and state sales tax is the second highest in the country and because the state has a plethora of tax exemptions for all kinds of transactions.
In an interview after the hearing, Allain said the tax swap he is proposing is a good first step to cleaning up the state’s tax code.
The Bishop-Allain bill also had the support of Dawn McVea, state director for the National Federation of Independent Business. She said that 70-80% of her members file their state taxes as individuals.
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Jan Moller, the director of the left-leaning Louisiana Budget Project, praised the bill for simplifying the tax code. But he said a better bill would be one that raised more revenue and addressed a tax system that makes low income people pay a higher percentage of their income in taxes than it does the wealthy.
People who earn less than $17,100 per year pay 11.9% of their income in income taxes, property taxes and sales and excise taxes combined while people who earn over $475,000 pay only 6.2%, according to Moller's group.
Companion measures to the Bishop-Allain bills would eliminate the federal deduction for corporate taxes while lowering the top corporate tax rate. Sponsored by state Rep. Neil Riser, R-Columbia, they passed the Ways and Means Committee last week.