BATON ROUGE, La. (AP) — A long-recommended proposal to untie Louisiana's income tax collections from federal tax payments won passage Thursday from lawmakers on the legislative session's last day, sending the concept to voters for a decision on the October ballot.
The proposal would get rid of personal income tax and corporate tax deductions for federal income taxes paid in exchange for lowering the state’s income tax rates. Louisiana also would permanently eliminate the corporate franchise tax for small businesses and lower the tax rate for others.
Franklin Republican Sen. Bret Allain, who led the Senate tax debate, hailed passage as a critical “tax reform."
Gov. John Bel Edwards could scuttle the tax swap if he vetoes individual pieces of a package that requires all measures to pass before it can take effect. If he rejects some bills, voters could still adopt part of the plan that lowers the top personal income tax rate, blowing a hefty hole in the budget without the remaining pieces of the tax package.
The Democratic governor seemed inclined to back the package, however, noting he's broadly supported the tax swap concept for years. He said he still needs to comb through the fine points of the measures, but added: “I expect to support those bills.”
Louisiana allows taxpayers to deduct the federal income taxes they pay from the computation of their state income taxes. When federal income taxes go up, Louisiana collects less in state taxes. When federal income taxes go down, state tax collections rise.
That leaves Louisiana's treasury harmed or helped by decisions out of state control — a situation that tax experts, economists and government watchdog groups have lamented for years.
The right-leaning Pelican Institute for Public Policy praised the tax package as starting “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.”
The left-leaning Louisiana Budget Project raised concerns. Jan Moller, head of the organization, objected that the tax changes would benefit business and higher-income taxpayers more than low- to moderate-income taxpayers. He also criticized triggers in the bills that could lower corporate franchise and personal income tax rates in later years if Louisiana sees certain revenue growth.
“It puts tax cuts at the front of the line," Moller said. "I think it’s bad policy for 2021 legislators to make this decision for future legislators who may have different priorities,” Moller said.
In exchange for losing the tax break for federal taxes paid, taxpayers would receive a 1.85% personal income tax rate on the first $12,500 of net income, down from 2%. The tax rate for the next $37,500 of income would fall from 4% to 3.5%, and the rate for income above $50,000 would drop from 6% to 4.25%.
The constitutional change would cap the maximum allowable rate of personal income tax in Louisiana at 4.75%, so lawmakers could never increase the rate above that percentage unless returning to voters.
On the corporate side, the proposal would scrap current rates that range from 4% to 8% and companies would lose the ability to deduct federal taxes paid from their state taxes. In exchange, the state would charge companies a 3.5% tax rate on the first $50,000 of earnings; 5.5% on earnings above $50,000 and up to $150,000; and 7.5% on earnings above $150,000.
Republican legislative leaders said they expect to largely raise the same amount of revenue for the state treasury. But a nonpartisan financial analysis of the bills suggests the state could lose some money in the early years of the changes.
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