Gov. Landry’s tax overhaul depends on swapping income for expanded sales taxes
4th November 2024 · 0 Comments
By Wesley Muller
Contributing Writer
(lailluminator.com) — A special legislative session Gov. Jeff Landry has called for next month is built around his proposed tax overhaul that could significantly reduce income taxes for virtually everyone in Louisiana and eventually increase how much money the state can access to spend over the next five years, according to early projections from the Legislative Fiscal Office and an independent economist.
All this depends on whether lawmakers back Landry’s plan as pitched.
The governor’s suggested fiscal maneuvers also call for permanent teacher pay raises, rather than a continuation of single-year stipends.
Landry is pushing the changes as solutions to an impending budget shortfall estimated at from nearly $600 million to nearly $800 million depending on the scenarios in play.
It’s estimated that the state’s general fund balance, which covers the cost of most government operations, would fall by roughly $124 million the first year. But in each year thereafter, it would bounce the other direction for a total of $259 million through the fiscal year ending in 2029, according to projections Revenue Secretary Richard Nelson shared Thursday with a Louisiana Senate committee.
The first-year slump is due primarily to the timing of when the changes would take effect. The proposal would expand the sales tax base for only part of fiscal year 2025, and revenue gains from repealed tax incentives likely wouldn’t be realized until 2026.
Nelson, Landry’s chief architect of the plan, also presented his agency’s parish-by-parish analysis of the tax plan’s impact on local governments. Most show a net increase in revenues. The Legislative Fiscal Officer Alan Boxberger said his office won’t be providing any similar analyses for local government.
The plan so far includes a package of proposals from the Landry administration that would make sweeping changes to Louisiana’s tax structure. Lawmakers have yet to submit any actual bills for the special session, so the Legislature’s fiscal staff has yet to tally up their exact impact.
The package of changes include, among other things:
• an expansion of state sales tax on a wider variety of services and digital products;
• the establishment of a flat tax on income for individuals and businesses;
• the repeal of the corporate franchise tax, a phase- out of inventory taxes; and
• the repeal of many special-interest tax credits.
Nelson was a strong proponent of tax reform when he served in the state House and proposed, unsuccessfully, to do away with the state income tax and the numerous tax breaks that lawmakers, over the decades, have enacted.
Many of the ideas in the tax package aren’t novel and have been proposed in previous years or are at work in other states. Nelson said he took elements from tax studies and pieced them together.
If the plan is enacted and its fiscal projections hold true, it would mean a big win for the governor to not only clear a fiscal cliff but deliver lower income tax bills to residents while doing so. Additionally, a new low flat tax rate and a modernized corporate tax structure would shore up Landry’s conservative reputation and afford him distinct bragging rights.
But much of that depends on several things aligning at a rather quickened pace. Off the bat, the governor needs overwhelming legislative support to enact core elements of the plan. And, ultimately, voters would have to approve a rewrite of the Louisiana Constitution’s tax section.
The income tax proposal would eliminate Louisi-ana’s three graduated income tax brackets that currently max out with a 4.25 percent rate and replace them with a single flat rate of three percent on all income. It would be paired with a much higher $12,500 standard deduction per filer, up from $4,500.
Such a high standard deduction “effectively eliminates the tax entirely” for the bottom tier of low-income filers who are taxed at a rate of 1.85 percent, 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 who currently pay 3.5 percent and 4.25 percent, respectively.
The lion’s share of the savings, roughly 54 percent, will go to the top 10 percent of income filers – those who earn $150,000 or more – while about 46 percent of the cut will go to the remaining 90 percent of households reporting lower incomes. This is largely because those with higher incomes generally pay a larger dollar amount of income taxes, according to the analysis.
A similar proposal within the package would replace the state’s corporate income tax with a 3.5 percent flat rate, down from a maximum 7.5 percent graduated rate.
“At the end of the day, everyone gets an income tax cut,” Nelson told senators last week.
To pay for these cuts, the administration is proposing to renew an expiring 0.45 percent sales tax, to end the many sales tax exemptions and big-ticket tax breaks for movie production, job creation and industrial manufacturing, and apply sales taxes to 40 new services.
Among the services the sales tax would apply to are car washes, dating and matchmaking services, shoe shining, fitness training, lawn care, decorating, photography, timeshares, event planning, pet sitting and pet grooming, research polling, boat storage, security, rideshares, space rentals, travel agents and lobbying.
Asked in a post-meeting interview whether the sales tax expansion might discourage consumer spending, Nelson said he expects it will largely go unnoticed for most of the public. He added that consumers will likely prefer having no more local sales taxes on prescription drugs – a measure that’s included among the changes.
Sen. Pat Connick, R-Marrero, recommended one change to the so-called sales tax “clean up” legislation at Thursday’s committee meeting – the inclusion of an exemption on repairs needed after natural disasters. Residents shouldn’t have to pay any more for home mitigation and renovation services, he said. Nelson agreed with the idea.
Louisiana Economic Development Secretary Susan Bourgeois told the committee all of her agency’s tax incentive programs, which cost roughly $450 million per year, would end under the new tax package. The agency would then work with lawmakers next year to propose any new incentives that fit within the new state taxation structure.
“We’re not looking for replacements,” Bourgeois said. “We’re looking for a reimagined toolbox…We are, in good faith, saying let’s sunset them, and we’re going to come back to you in March or April next year and propose the new toolbox.”
So far, lawmakers have been generally receptive of the plan, though some expressed concern with getting local governments on board with it, particularly in parishes that collect a lot of inventory taxes.
Part of the plan includes giving local officials the option to do away with their inventory taxes, which businesses currently pay to local governments but are later reimbursed through a state tax break.
This strange setup has essentially transformed the inventory tax into a mechanism to make the state cover the expenses of some parish governments.
To persuade local officials to immediately do away with their inventory taxes, Landry’s proposal would offer 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.
Nelson told lawmakers he believes all the new sales tax revenue that would be collected at the local level will more than make up for their losses in inventory tax revenue.
Local governments could lose whatever taxes they placed on prescription drug sales, which the governor wants removed to fall in line with the state exemption.
A so-called sales tax “clean up” bill would mandate a local sales tax exemption on manufacturing machinery and equipment. Its fiscal impact is not yet clear, and Nelson told lawmakers it might be converted from a mandate to an option if the cost to local governments cannot be offset.
Lastly, another significant proposal is using roughly $2 billion in three educational trust funds to pay off teacher retirement debt, freeing up nearly $300 million. Nelson said with the state raising this debt, parish school boards could permanently increase K-12 staff salaries an average of over $2,000.
This and the inventory tax changes both would require changes to the Louisiana Constitution. Constitutional amendments need support from two-thirds of each legislative chamber followed by voter approval. They would appear on a March 29 ballot, likely alongside other proposals, if lawmakers approve.
This article originally published in the November 4, 2024 print edition of The Louisiana Weekly newspaper.
