What could a flat tax mean for Louisiana?

By Christopher Tidmore
Contributing Columnist

Could enacting a flat tax forestall a larger tax cut and avoid a fiscal cliff for Louisiana? That is the apparent behind-the-scenes logic in the proposal detailed by the Landry administration on Tuesday, October 7.

Quite a few observers were surprised when the governor’s revenue secretary, Richard Nelson, first proposed the creation of a Louisiana flat income tax rate of 3.8 percent in the midst of a looming fiscal crisis last month. The Landry administration doubled down on that proposal at the House Ways and Means committee meeting last Tuesday when Nelson updated his proposal to a three percent flat tax on individuals, and a 3.5 percent flat tax on corporations. The administration also proposed elimination of the corporate franchise tax and major modifications to the inventory tax. Likewise, in order for Louisiana also to cover the loss of revenue, Landry hopes to the legislature to eliminate nearly every tax benefit which goes to the cultural economy as well as many areas of industrial economic development – including the quality jobs credit. And the “temporary” .45 percent sales tax would become permanent, adding another $455 million to the LA Treasury.

In recent weeks, however, it has also become clear that Landry’s flat tax proposal serves as stealthy method to ward off an almost equally large income tax cut – instituted by the previous administration. A 2021 state law created a series of conditions, which when met would automatically reduce income tax rates “by multiplying each current rate by the difference between one and the percentage change in individual income tax collections in excess of the individual income tax collections for Fiscal Year 2018-2019 adjusted annually.”

In layman’s terms, existing state law mandates an across-the-board income tax cut of approximately $200-$400 million (depending upon how the formula is calculated), and that would be on top of the automatic sales tax reduction – for an approximate $800-million deficit. This unforeseen tax cut came about because the circumstances which required fully funding the rainy day fund, earning a certain percentage increase in tax revenue, and other specific factors seemed incredibly unlikely to occur in 2021. In other words, the legislature passed a tax cut that they never thought would happen!

However, Louisiana – for just one year – hit all of the unlikely fiscal qualifications requiring an automatic tax cut. Landry has been scrambling to offer another alternative, proposing a tax cut which would not blow a hole in 2025 budgetary revenues. His answer is to create a flat tax, and simultaneously, get rid of every business tax incentive program. In other words, kill the film, music, live performance, digital, economic development and other tax credit benefits which cost the state about $1 billion a year (but keep our cultural economy alive as well).

Through this rationale, Landry can cut the overall income tax rate even more than the 2021 law mandates, whilst keeping the sales tax in place. The cultural economy corporate community, from filmmakers to the music industry (who are not fans of Landry in the first place), pay the brunt of the bill – along with certain elements of the L.A.B.I. corporate/chemical/industrial community (who generally supported his GOP opponent Stephen Waguespack) with the elimination of the quality jobs credit.

Louisiana’s poorest citizens would do better under Landry’s Flat Income Tax proposal than the across-the-board tax cut, with the first $12,500 of incomes completely eliminated from taxes instead of a fraction cut off from the current 1.85 percent income tax rate. However, the .45 percent state sales tax would remain in what Nelson explained to the committee on Oct 8 as a “policy choice” between a 0.45 percent sales tax or a half-percentage of personal income tax. The richest Louisianans would see income taxes fall from 4.25 percent to three percent. Some seniors might enjoy a personal income tax deduction of up $37,000: With voter approval, the tax deduction for individuals over 65 would be $25,000, and some could tack on an additional $12,000 tax break for retirement income.

Teachers would keep the $2,000 pay raise, past as a temporary measure under John Bel Edwards. Landry’s proposal achieves this through a two-step process: pay off a significant chunk of high-interest debt for which local governments are currently indebted to repay and then require local governments to allocate those savings to increased teacher pay. “That’s the administration’s depermanent through those two mechanisms,” Nelson said.

Landry’s Revenue Secretary explained that the $2 billion currently in constitutionally protected educational trust funds would be dedicated to reducing high-interest “unfunded accrued liability” or UAL debt – owed to the Teacher’s Retirement System of Louisiana. Paying off the $2 billion would create savings of about $300 million annually, Nelson outlined. School districts would henceforth be required that they redirect the former debt payments toward teacher salary increases.

With the elimination of the cultural tax incentives, the increase income tax on so some elements of the working-class, as well as debt retirement, the Louisiana budget would approach balance, and Pelican State would fall near the bottom of the list in top income tax rates levied on a state-by-state basis, at near parity with Indiana and Pennsylvania. (Neighbors Texas, Florida and Tennessee as well as Alaska, Nevada, South Dakota, Washington and Wyoming levy no state income tax.)

The entire tax reform proposal stretches across 10 separate pieces of legislation, first introduced on October 3. Gov. Landry is expected to call a special session of the Louisiana Legislature in November to deal with tax reform and fiscal matters.

This article originally published in the October 14, 2024 print edition of The Louisiana Weekly newspaper.