Over the past 20 years, governors and state legislators have said repeatedly that Louisiana needs to reform its complicated tax system.
But those efforts have failed repeatedly because the tax changes would have required some people and corporations to pay more — and those people and corporations have squawked loudly enough to derail any proposals.
Gov. Jeff Landry is launching his own effort to win approval to revamp the tax system during a special session in November. He will call that session at some point over the next six weeks if enough legislators will buy into his plans.
Landry and Richard Nelson, the Department of Revenue secretary who is his point person on taxes, have yet to spell out the full range of their ideas to either legislators or the public. And, as legislators like to note, the devil is in the details.
But in broad strokes, Nelson has said in recent days that Landry wants to scrap Louisiana’s graduated income tax system — where people and companies pay at higher rates as they earn more — with a single, flat rate that would be low enough to cut taxes for everyone.
Landry and Nelson would offset the loss for the government in part by reducing or ending tax loopholes and by extending the sales tax to services that go untaxed today. But making those moves would face opposition from entrenched special interests.
So the key question facing Landry, Nelson and lawmakers is this: Can they approve a plan that raises enough money to pay for vital government programs while not shifting the tax burden from the wealthy to lower-income taxpayers?
By itself, adopting a flat tax would cut payments by the wealthy and raise them for lower-income taxpayers because the wealthy would begin paying taxes at a lower rate while lower-income taxpayers would start paying at a higher rate.
Regressive tax system
Louisiana already has a regressive tax system where people who earn less than $18,000 pay 13.1% of their family income in taxes while people who earn over $552,000 pay only a 6.5% tax rate, according to the Institute on Taxation and Economic Policy, a progressive nonprofit in Washington, D.C.
Nelson has said that the administration would keep lower-income taxpayers from paying more by nearly tripling the standard deduction to $12,500. As a result, he has said, the flat tax plan would reduce taxes for all taxpayers.
But that invites another question: If everyone receives a tax cut — and who doesn’t want one? — how will the state government, with less money available, continue to pay for the services that people expect? That question is especially relevant because lawmakers are facing a $600 million to $800 million shortfall in spending next year, in part because a temporary .45-cent sales tax is scheduled to expire on June 30.
While Congress under Republicans and Democrats alike runs budget deficits every year, Louisiana cannot do that, points out Jan Moller, executive director of Invest in Louisiana, a progressive group in Baton Rouge.
“The state has to balance the budget, unlike Washington, where tax cuts can be paid for down the line or paid for with a credit card,” he said.
Because of that, the House Appropriations Committee has already begun taking testimony from key stakeholders on what would happen if state government has to spend less next year.
“What we’ve learned is that the loss of revenue would cause substantial impacts, particularly on children and the elderly,” said state Rep. Jason Hughes, a Democrat from New Orleans who is the committee’s vice chair.
Breadwinners with severely disabled people can do their jobs today because government aid pays for home health care workers, Hughes noted. Without that assistance, “they’d be forced to stay home with their loved ones,” Hughes said.
“That is not pro-life or pro-Louisiana,” he added.
Moller noted that budget cuts would hit not only the disabled but also the state’s colleges and universities, health care for the poor, the prison system and potentially hundreds of other services.
Mitigate winners and losers
Rep. Julie Emerson, R-Carencro, will play a key role in the coming weeks because she chairs the Ways and Means Committee, which takes the first crack at hearing tax bills in the Legislature. She is holding a joint hearing with her committee and the tax-writing Revenue & Fiscal Affairs Committee on Wednesday. Nelson will begin presenting his plans.
“One of my goals in this is to mitigate the winners and losers,” Emerson said. “But with tax reform, it’s difficult. If you make one change, it has a ripple effect. The only change that would make everyone excited is if we said we’ve figured out how to run government without taxes.”
Nelson noted that Landry and Republicans who hold a majority in the House and Senate believe that state government spending grew unnecessarily under Gov. John Bel Edwards, a Democrat, which would mean they can approve a flat tax plan that raises less money than the current system without hurting the public.
“The Legislature would like to see some belt-tightening from the agencies,” Nelson said.
Today, individuals who earn up to $12,500 pay 1.85% of their income in taxes, those who earn between $12,500 and $50,000 pay 3.50% and earners above $50,000 pay 4.25%.
Nelson said collapsing those three rates into a 3.8% rate would generate as much money. But that change would raise taxes on people who earn below $50,000 while cutting them on individuals who earn more than $50,000. That’s why his plan includes raising the standard deduction to $12,500 from the current amount of $4,500. Those changes together would cost the state $500 million per year.
Nelson hopes to end up with an individual tax rate that is below 3.8%. But that would depend on whether lawmakers also eliminate tax breaks on income and sales taxes.
Nelson wants to end up with a corporate tax rate of 5%, which is the effective rate corporations pay today. Louisiana has the highest corporate tax rate in the South, at 7.5%, Nelson said, but tax breaks lower how much the companies actually pay. Landry and Nelson also want to eliminate the corporate franchise tax, which raises about $400 million per year.
Battle scars
Julie Stokes still bears the battle scars from countless hours as a Republican state representative from Kenner overseeing a study commission that identified the sales tax exemptions and exclusions cluttering the tax code — in an effort that ultimately failed to eliminate any.
“There’s an endless sea of interested parties,” Stokes said.
Unable to end tax breaks in the past helps explain why Louisiana has the country’s highest state and local combined sales tax at 9.56%. Edwards resorted to getting legislators to raise the sales tax by 1% in 2016 to avoid painful budget cuts, and they renewed that tax at 0.45% in 2018. If it expires next year, the state would lose $450 million in revenue.
Legislators face another hurdle to end tax breaks or extend the sales tax to services. That would require a two-thirds vote in each chamber. Even imposing a flat tax might require a two-thirds vote since low-income taxpayers would face a higher rate.
Nelson said the Landry administration has no plans to try to win legislative and voter approval to remove the sales tax exemption for groceries, prescription drugs and residential utilities.
Jim Richardson, a retired LSU economics professor, has served on numerous commissions that have studied the state tax system.
“Taxes are very sensitive,” he said. “You can talk about what is good, but people look at the changes and say: What does it mean for me?”