The Tax Foundation, a nonpartisan and nonprofit tax research organization, has been analyzing and tracking tax issues since 1937 and this past month they took on the task of evaluating Governor Jeff Landry's recently announced tax reform package for Louisiana. This package addresses the state's inefficient and uncompetitive tax policies, which have left Louisiana lagging behind other states.
Current State of Louisiana's Tax Code
Louisiana's tax code ranks 40th overall in the Tax Foundation's State Business Tax Climate Index (Index). The Index evaluates state tax structures based on five components: individual income taxes, sales taxes, corporate income taxes, property taxes, and unemployment insurance taxes. Louisiana's tax code demonstrates significant room for improvement, with only its property tax and unemployment insurance tax components ranking in the top 25.
Despite some recent legislative efforts to improve the tax environment, such as reducing the franchise tax rate and eliminating the throwback rule, Louisiana continues to face challenges. The state is a net out-migration state, with very few parishes experiencing population gains. This trend is partly influenced by tax policies, and aligning with sound tax principles can help recruit and retain both individuals and businesses.
Key Components of the Tax Reform Package
Governor Landry's tax reform package focuses on several key areas, including individual income taxes, corporate income taxes, and sales taxes. Here, we evaluate the proposed reforms and their potential impact on Louisiana's tax competitiveness.
Individual Income Taxes
The proposed transition from a graduated-rate income tax to a single-rate tax is a positive step towards simplicity and transparency. This reform would prevent bracket creep, which occurs when inflation pushes taxpayers into higher brackets without an increase in real income. Additionally, indexing the standard deduction for inflation would further enhance fairness in the tax code.
The treatment of S corporations is another area requiring reform. Currently, Louisiana treats S corporations as C corporations for tax purposes, which is inefficient and uncompetitive. Recognizing S corporation status would align Louisiana with other states and improve its business environment.
Corporate Income Taxes
The proposed corporate tax reforms include transitioning to a single-rate corporate income tax, which offers benefits similar to those of a single-rate individual income tax. Removing targeted incentives would introduce greater neutrality into the tax code, benefiting all corporate taxpayers. Additionally, adopting permanent full expensing would significantly enhance Louisiana's regional and national competitiveness by allowing businesses to immediately deduct the full cost of qualifying expenses.
Sales Taxes
Louisiana's sales tax code still lacks uniform administration, disproportionately affecting remote sellers and marketplace facilitators. Centralized sales tax collection would reduce compliance burdens and potentially increase revenue collections. The state also needs to address the taxation of business inputs and high local option sales tax rates, which contribute to tax pyramiding. Expanding exemptions for farm equipment and better aligning state and local sales tax bases could mitigate these issues.
Property Taxes
Louisiana boasts relatively low property tax rates compared to other states. However, the imposition of both the franchise tax and the inventory tax undermines the state's competitiveness. The franchise tax penalizes investment, while the inventory tax disproportionately impacts businesses with large inventories. Repealing these taxes, along with implementing the proposed corporate tax reforms, would provide a substantial boost to Louisiana's economic environment.
National Trends and Louisiana's Position
Many states have leveraged strong revenues and surpluses in recent years to enact tax relief and enhance competitiveness. Since 2021, numerous states have reduced individual and corporate income tax rates. The trend continued into 2024, with several states implementing notable tax changes.
One significant trend is the movement towards flat individual income taxes. States like Arizona, Iowa, Mississippi, and Georgia have either implemented or are phasing in flat tax rates. Flat taxes simplify the tax code, making revenue forecasting easier and providing taxpayers with greater certainty regarding their liabilities.
Evaluating the Proposed Reforms
Governor Landry's tax reform package aligns well with national trends and the principles of sound tax policy. The proposed changes would enhance simplicity, transparency, neutrality, and stability within Louisiana's tax code. These reforms could potentially elevate Louisiana from the bottom 10 to the top 10 in the Index rankings, significantly improving the state's competitiveness.
Conclusion
Tax reform is a complex and challenging endeavor, but Governor Landry's proposed package represents a meaningful effort to provide relief to Louisiana taxpayers and create a more competitive business environment. The Tax Foundation applauds these efforts and supports the comprehensive reforms that aim to recruit and retain individuals and businesses in Louisiana.