Louisiana House of Representatives. (JC Canicosa/Louisiana Illuminator)
The central elements of a bid to revamp Louisiana’s tax system by swapping more sales taxes for a lower flat tax on income cleared the state House of Representatives on Tuesday.
House lawmakers approved a handful of bills from Gov. Jeff Landry’s tax package, which would affect virtually every worker, business and local government in the state.
The bills each received support from roughly 78% or more of the Republican-majority House voting in favor of the changes. Opposition came from around a dozen or so lawmakers, mostly Democrats.
Tax bills require passage with two-thirds of the Legislature, which equates to 70 votes in the House and 26 in the Senate. Voters statewide have to approve the changes when they appear on the ballot next March.
Louisiana Revenue Secretary Richard Nelson has touted the plan as a way to broaden the state’s tax base by getting more people into the system, which could ease the burden on those who currently pay taxes and also increase state revenues.
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Flat income tax advances
Individuals and business owners who file income taxes will be affected most by the flat tax bill, House Bill 1, sponsored by Rep. Julie Emerson, R-Carencro. It 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 the current $4,500.
Additionally, it would double the exemption on pension and annuity income for filers 65 and older from $6,000 to $12,000.
Currently, the state’s three graduated income tax brackets levy rates of 1.85% on the first $25,000, 3.5% on the next $75,000 and 4.25% on any income above $100,000. Although a new flat rate of 3% would be nominally higher for low-income filers currently taxed at 1.85%, the 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.
House Bill 1 also contains trigger provisions that will automatically reduce the income tax rate if state general fund revenues reach a certain threshold.
To pay for the lower income tax rate, Louisiana would add sales taxes to 40 types of services and digital goods. Additionally, other legislation in the package would renew an expiring 0.45% state sales tax, end the state’s many sales tax exemptions and eliminate tax breaks for movie production, manufacturing jobs and other industries.
The services tax bill awaits a floor vote in the House, which is expected to happen Thursday. 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, ride shares, space rentals, travel agents and lobbying.
Small business owners and sole proprietors would be required to collect and remit those taxes to their parish every month.
While debating her legislation on the House floor, Emerson told her colleagues it would provide a tax cut to every person in Louisiana.
Rep. Matt Willard, D-New Orleans, who has been one of the most vocal critics of the tax package, disputed Emerson’s statement, saying he believes the expansion of sales taxes could hurt some residents, particularly those with lower incomes.
Local governments, teachers and a growth limit
Among the package of bills is an enormous piece of legislation driving much of the governor’s tax overhaul: House Bill 7, also sponsored by Emerson. It calls for a rewrite of Article VII of the Louisiana Constitution, which deals mostly with taxation and spending. House lawmakers approved it in a 81-15 vote.
The 139-page bill would, among other things, allow local governments to opt out of collecting business inventory taxes, which they currently pay to local governments but are later reimbursed through a state tax credit. This aspect of the bill would significantly affect parishes that rely heavily on inventory tax revenue.
To persuade local officials to immediately do away with their inventory taxes, Landry’s proposal offers local governments a one-time, lump sum equal to three times their yearly inventory tax revenue up to a maximum of $15 million. Parishes that phase it out over several years would be eligible for payments equal to the actual prior year’s collections.
House Bill 7 would double the standard individual income tax deduction for senior citizens, exempt prescription drugs from state sales taxes and make it harder to adopt tax breaks
It would also permit the use of money from three constitutionally protected educational trust funds to pay off local school systems’ debt owed to the state teacher retirement system. The move would free up local money for permanent K-12 teacher pay raises of over $2,000 on average.
Emerson’s legislation would also prohibit local governments from adopting their own tax breaks without approval from the Legislature. It also removes a number of property tax exemptions from the state constitution, placing them into statute. That would allow lawmakers to repeal them with a two-thirds vote rather than having to seek voter approval with constitutional amendments.
A statutory companion bill, House Bill 11, to repeal the inventory tax exemption and codify the other property tax incentives such as the homestead exemption, cleared the House in a 80-16 vote.
Included in Emerson’s constitutional amendment is a proposal to establish a “government growth limit,” which would require lawmakers to calculate a limit annually on how much money the state can spend on recurring expenses. Such costs are typically incurred each year in approximately the same amounts, such as health care, teacher pay and state police salaries.
The government growth limit would be an additional restriction on top of the spending cap currently in the Louisiana Constitution. The new restriction would apply in situations when state revenues have grown by a certain percentage, allowing lawmakers to only spend the extra cash on one-time, non-recurring expenditures.
Lawmakers would have to calculate the percentage that sets the limit using the provisions outlined in House Bill 13, a companion bill Rep. Brett Geymann, R-Lake Charles, sponsored. His measure cleared the House floor in a 81-14 vote Tuesday.
Corporate America
Another component to the package is House Bill 3, also sponsored by Emerson, would repeal the state’s corporate franchise tax. It cleared the House in an 83-14 vote.
A franchise tax, also called a capital stock tax, is essentially a price mostly large corporations pay just to do business in the state. Louisiana is one of 15 states that collects a franchise tax, according to the Tax Foundation, a think tank that generally advocates for low taxes.
The foundation argues franchise taxes penalize investment and require businesses to pay regardless of whether they make a profit.
Progressives in the Legislature, such as Willard and Rep. Mandie Landry, D-New Orleans, have argued a repeal of the franchise tax will mostly benefit out-of-state shareholders of wealthy corporations. Louisiana’s franchise tax applies only to C corporations, typically large companies that publicly sell shares of ownership on the stock market.
Nelson, the revenue secretary, has pushed the tax package as a way to attract new businesses to the state while relieving some of the income tax burden on the poor and middle class.
In a committee hearing Sunday, he told lawmakers future effects of the tax overhaul would best be measured through population growth and median household income.
“I think three years from now, you’ll see a significant change in those numbers,” Nelson said.
Some of the bills the House cleared Tuesday could receive their first committee hearings in the Senate as early as Friday.
Other measures in the tax package, including a flat tax proposal for business income, are still pending approval in the House and are expected to be heard on the floor in the coming days.
Lawmakers must end their special session by 6 p.m. Nov. 25.
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