Rep. Julie Emerson, R-Carencro, speaking to Rep. Charles Owen in the House Chamber. (Allison Allsop/ Louisiana Illuminator)
State lawmakers advanced two major pieces of legislation Thursday that would establish a flat tax on income and fully repeal a tax on large corporations.
House Bill 1 and House Bill 3, both sponsored by Rep. Julie Emerson, R-Carencro, cleared the House Ways & Means Committee with overwhelming support from Republicans.
Greatly outnumbered in the Legislature, Democrats could mount only three votes in opposition to House Bill 1, which would establish a flat rate on individual income taxes. The opposing votes came from Rep. Marcus Bryant of New Iberia and Reps. Mandie Landry and Rep. Matt Willard of New Orleans. A fourth Democrat on the committee, Rep. Ken Brass of Vacherie, voted with Republicans on the measure.
House Bill 3 advanced with a 17-1 vote, receiving opposition only from Willard. That bill would repeal the corporate franchise tax, which is essentially a tax that mostly large corporations pay just to do business in the state.
Louisiana is one of 15 states with a franchise tax, also called a capital stock tax, according to the Tax Foundation, a think tank that generally advocates for low taxes. The Tax Foundation argues that franchise taxes penalize investment and require businesses to pay regardless of whether they make a profit.
Both bills are part of Gov. Jeff Landry’s proposed tax overhaul and are among several legislative instruments lawmakers will consider in the November special session.
The flat tax proposal would eliminate Louisiana’s three graduated income tax brackets and replace them with a single flat rate of 3% on all income. It would also establish a much higher $12,500 standard deduction per filer, up from $4,500.
Additionally, it would double the exemption on pension and annuity income for filers 65 and older from $6,000 to $12,000.
Both the standard deduction and the retirement exemption would be tied to inflation and undergo annual adjustments in accordance with the consumer price index.
Currently, the state’s three graduated brackets tax income at 1.85% on the first $25,000, and then 3.5% on the next $75,000, and then 4.25% on any income above $100,000. Although a new flat rate of 3% would higher for low-income filers currently taxed at 1.85%, the establishment of a much higher standard deduction “effectively eliminates the tax entirely” for the bottom tier of filers, according to an analysis from Greg Albrecht, the Legislature’s former chief economist for more than two decades.
The reduced and flattened income tax rate would provide huge savings to middle and top-tier filers. The lion’s share of the savings, roughly 54%, will go to the top 10% of income filers — those who earn $150,000 or more — while about 46% of the cut will go to the remaining 90% of households reporting lower incomes. This is largely because those with higher incomes generally pay a larger dollar amount of income taxes, according to Albrecht.
Still, the idea that most of the savings would benefit the wealthy did not sit well with some lawmakers.
Willard pointed out that someone making $25,000 per year would save $224 under the proposal.
“I would argue that somebody making $25,000 to $30,000 needs a whole lot more than $224,” he said, adding that the people who would benefit the most are the ones who need it the least.
Louisiana Department of Revenue Secretary Richard Nelson, who fashioned Landry’s tax proposal, pointed out that lower income filers would have a lower tax burden than what they currently have while the top tier of filers would pay a larger share, roughly 61%, of the state’s individual income tax.
Gov. Landry’s tax overhaul depends on swapping income for expanded sales taxes
The best way to help lower income filers is to get them better jobs by creating new opportunities for businesses to expand to Louisiana, Nelson said in response to Willard.
Another provision in the bill replaces current tax rate reduction triggers with new ones that are based on general fund revenues instead of tax collections.
Back in 2021, lawmakers inserted the current triggers into a tax reform package under the assumption that high income tax collections would mean the state is flush with cash and can afford to give everyone a tax cut. The idea was to make those tax cuts automatic whenever collections reach a certain threshold.
Lawmakers now realize the state is on the brink of that threshold but is not flush with cash and could face a budget shortfall of over $700 million next year.
“When we did the tax reform package in ’21, we put those triggers in there, and basically everybody said it would have to be raining gold and diamonds in Louisiana for us to hit those triggers,” Willard said, asking Emerson why she would elect to include a new trigger in the bill.
Emerson said she is not opposed to removing the triggers but explained they move Louisiana closer to fully eliminating its income tax.
“There’s a lot of states around us now that have zero [income tax] and are thriving,” Emerson said.
The problem with the current triggers is that they are based on collections, according to Nelson. Replacing them with new triggers tied to revenue gives the state much more protection from unforeseen financial events, he said.
The flat tax bill would cost the state about $334 million when it first takes effect next year and then more than $1 billion each year thereafter.
To cover the cost, the administration is proposing to renew an expiring 0.45% sales tax, to end the state’s many sales tax exemptions and eliminate big-ticket tax breaks for movie production, job creation and industrial manufacturing. Additionally, state sales taxes would be applied to 40 new services.
Among the services the sales tax would apply to are car washes, online dating and matchmaking apps, shoe shining, fitness training, lawn care, interior decorating, photography, timeshares, event planning, pet sitting and grooming, research polling, boat storage, security, rideshares, space rentals, travel agents and lobbying.
Lawmakers plan to debate some of the sales tax legislation Friday morning at the next House Ways & Means Committee hearing.
The flat tax bill will be heard next in the House Appropriations Committee, and the franchise tax bill is awaiting consideration on the House floor.
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