Louisiana passes tax modernization, refers income tax cap to voters

Update: On November 13, 2021, Louisiana voters approved Amendment 2, adopting the proposed income tax reduction. 

Traditionally, Louisiana has severely lagged behind other states in the area of tax policy, consistently ranking in the bottom ten states on the Tax Foundation’s State Business Tax Climate Index. However, Louisiana’s state legislature recently passed an impressive tax reform package to modernize the state’s tax code. The package consists of six bills aimed at lowering both personal income and corporate income tax.

Like our neighbors in Iowa prior to recent tax reforms, Louisiana has historically offered a tax deduction for federal income taxes paid. A bill approved by lawmakers, H.B. 278, removes this provision, helping to broaden the state’s tax base. In exchange, Louisiana taxpayers will pay lower state income tax rates.

In addition, the bill includes a trigger system that will further reduce income taxes for individuals as the state’s economy grows over the next ten years. Eliminating federal deductibility also has the added benefit of creating more predictability and stability for the state’s revenues.  

“Today, the legislature took the first step in crafting tax reform necessary to write Louisiana’s comeback story. Today’s actions start the process of simplifying our overly complex and burdensome tax code that has sent jobs and opportunity to other states and hurt Louisiana’s families for far too long,” said Daniel Erspamer of the Louisiana-based Pelican Institute.    

 The package also includes a constitutional amendment, S.B. 159, that would cap the maximum income tax percentage at 4.75%. The amendment passed through the legislature but needs to be approved by Louisiana voters. If it passes, Louisiana’s maximum personal income tax rate would only be higher than four other states that also levy a personal income tax.    

Louisiana’s maximum tax rate would be set at 4.75%. By comparison, Nebraska’s highest tax bracket is 6.84%.

The enactment of the entire tax reform package is contingent on S.B. 159 passing. The amendment is up for a vote in October, with voters answering the question, “Do you support an amendment to lower the maximum allowable rate of individual income tax and to authorize the legislature to provide by law for a deduction for federal income taxes paid?”

Here are more details on the changes that would occur if the amendment is approved by voters:    

• Personal income tax rates would be reduced from 2%, 4%, and 6%, to 1.85%, 3.50%, and 4.25%, respectively.
  
• Corporate income tax brackets would be reduced to 3.5% below $50,000 of net income; 5.5% on net income between $50,000 to $150,000; and 7.5% on net income over $150,000. The changes would apply for tax periods beginning on and after January 1, 2022.   
• Louisiana’s franchise tax on capital would be eliminated up to $300,000 and the tax rate would be reduced 0.3% to 0.275% for capital above $300,000.  

If the package does pass then Louisiana can expect to shoot up several spots on the Tax Foundation’s yearly tax climate rankings, where it currently sits in 42nd place. Louisiana is just one of a growing list of states that is looking to modernize its tax system to become more attractive to individuals and businesses.    

While Nebraska is currently closer to the middle of the pack than Louisiana on its overall tax policy, it too could benefit from modernizing parts of its tax structure that are no longer aligned with a 21st century economy.