Louisiana’s state income tax debate
Published 6:39 am Sunday, November 13, 2022
By Molly Ryan
LSU Manship School News Service
With no personal income tax and booming economies, Texas, Florida and Tennessee are once again drawing attention from Louisiana lawmakers who are wondering if eliminating income tax could create the same boom in their state.
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During a House Ways and Means Committee meeting in September, lawmakers began studying the state’s taxes as part of a House resolution passed earlier this year. It tasks the committee with making recommendations to the Legislature about Louisiana’s tax structure, including the state income tax.
Rep. Richard Nelson, a Mandeville Republican and the son of an IRS agent, argued that rebuilding the state’s tax structure and eliminating the income tax is necessary to make Louisiana more competitive and attract investment.
He points out that Texas and Florida grown in population six times faster than Louisiana.
“When you look at the state, and you look at the trajectory that we’re going, I think the tax structure in Louisiana is one of the fundamental things that’s holding us back,” Nelson said.
Revamping the state’s tax structure is a difficult task that has thwarted even the most dedicated lawmakers. In the last decade, similar proposals have gained little to no traction, including a series of bills proposed by Nelson in 2021 that would have eliminated the corporate and individual income taxes, and raised the state portion of the sales tax from 4.45 to 6 percent while capping local sales tax rates at three percent.
Nelson’s latest plan calls for a similar increase in sale taxes, and critics say it would shift more of the overall tax burden from wealthier to lower-income residents.
“Louisiana’s income tax is very low by national standards, yet the revenue it raises provides critical support for our schools, hospitals and other vital services,” the Louisiana Budget Project wrote in its newsletter last month. “Eliminating this tax would inevitably shift the responsibility for paying taxes from wealthy people and corporations to low-income Louisianans and small businesses and make it much harder to balance the state budget each year.”
Daniel Erspamer, the head of the Pelican Institute for Public Policy, a research group, said the complexity of Louisiana’s tax structure and Constitution present an obstacle that other states did not have to tackle, and he is skeptical about whether Gov. John Bel Edwards would support Nelson’s proposal.
“We have 432 pages of tax preferences in the corporate tax code alone,” Erspamer said. We have one of the longest and most complex state Constitutions in the country, and a big chunk of that is related to taxation,” he said.
“It’s always a challenge to do transformational things in an election year,” Erspamer added. “How quickly it moves this year, I think, just depends on how courageous lawmakers are willing to be in an election year.”
State income tax accounts for $4.3 billion, or 11 percent, of the state’s $39 billion operating budget, which includes a sizable contribution from the federal government. Of all revenue Louisiana raises, the income tax accounts for about 22 percent.
Nelson and other proponents believe it is possible to replace that money with a much broader property and sales tax and limited exemptions for individuals and corporations. All those steps will likely face pushback.
“The devil on these things is always in the details,” said Rep. Tanner Magee, the Houma Republican who serves on the House Ways and Means Committee. “I think most, maybe not all, legislators would love to get rid of the state income tax, but you have to figure out how you’re going to replace that revenue.”
Debbie Vivien, chief economist for the Legislative Fiscal Office, a nonpartisan agency that advises the Legislature, acknowledged the temptation to cut taxes during the current period of high inflation and state budget surpluses. However, she cautioned lawmakers against making any large changes.
“If you’re tempted to cut, just keep in mind we have a far way to fall at this point,” Vivien said.
Eight states – Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming – do not have a personal income tax.
As lawmakers continue to point to states like Texas, Florida and Tennessee, Magee notes that Louisiana’s tax structure is not so comparable to these other states.
Unlike Louisiana, Texas does not have a property tax homestead exemption. It has higher sales and property taxes and provides healthcare at a local level, which Louisiana does not. And any attempt to reduce the homestead exemption also could spark opposition in Louisiana.
Magee is a proponent of eliminating the income tax, but he is not optimistic that a bill will pass in the 2023 session. Proponents will likely expand the sales tax to include more items, which is expected to be met with resistance.
“They expand the base of the sales tax, which is probably a good idea,” Magee said. “But you’re taxing people on the sales tax side that have never been taxed before.”
Magee, who is running for a state appeals court judgeship, suggests lowering the income tax over time to avoid this opposition and any confusion.w
“I think we can do a lot to lower our income tax and be competitive and move in that direction,” he said. “And I think I would personally prefer us to do that. Even though it’s incremental, we’ll see better tax policy than taking big swings and big misses.”
The increased revenue from federal aid after Hurricane Katrina led the Legislature and governor to make tax cuts, resulting in less revenue. When those federal dollars were spent, the state was left with a large deficit.
The federal aid Louisiana received from the COVID-19 pandemic and the temporary sales tax increase passed in 2018 puts the state in a similar position today.
In response to the abundance of hesitancy over the proposal, Rep. Gerald “Beau” Beaullieu, a New Iberia Republican and vice chair of the House Ways and Means committee, wants people to remember one thing:
“We’re not trying to lower taxes just for the sake of saying, ‘Hey, we’re lowering taxes,’” Beaullieu said. “The end to all of the means is that we want to create more jobs for Louisiana.”