The special session on tax reform just getting underway is a big one. It represents the most significant attempt to rewrite large sections of our tax code that we have seen in years. How successful it will be remains to be seen, but whatever the outcome, this is a debate Louisiana should have.
Tax reform is hardly a new issue in Louisiana. One might wonder why we talk about it so much since no one considers us a high-tax state. Well, the reason isn’t the tax burden. It’s the tax structure. We described it well in our RESET Louisiana tax policy brief published last year in collaboration with PAR and the Committee of 100:
“Louisiana’s tax system lacks fairness, simplicity, and competitiveness and has failed to adapt to changing circumstances. The overall tax burden is low compared to other states, but the system’s complications leave Louisiana at a disadvantage. Simply put, this is the worst of possibilities.”
We went on to say that Louisiana’s tax structure is unnecessarily complex, which results in higher-than-needed tax rates because the tax base is narrowed by too many exemptions, deductions, and credits. It also includes antiquated taxes on the business side that most states have moved away from and places a lot of our tax law in the constitution, which makes it difficult to change.
What is encouraging is that the tax reform proposal put forward by the administration seeks to address almost all of these issues. It’s a wide-ranging plan that among other things:
- Lowers individual income tax rates to a flat rate of 3%.
- Broadens the sales tax base to include some services and digital products.
- Reduces corporate income tax rates and eliminates the corporate franchise tax.
- Eliminates exemptions, deductions, and credits.
- Moves some tax language and money funds out of the constitution.
- Pays off a portion of teacher retirement debt and provides teachers a permanent pay raise.
Of course, one of the major questions of any tax reform is how it impacts taxpayers. In seeking to answer that question, our RESET initiative enlisted respected economist Greg Albrecht to review the individual income and sales tax components of the plan and provide his analysis.
In doing so, a couple of major findings emerged:
- In considering the changes to income and sales taxes, the vast majority of Louisiana citizens will see a tax cut, almost all in double digit percentages and more than half totaling 20% or more.
- It appears that the income tax becomes modestly more progressive, and the sales tax becomes slightly less regressive as a result of the proposed changes. Overall, the distribution of tax liabilities across all levels of income amounts to little or no change from the current system.
It went on to find that individuals at lower income levels generally receive a higher percentage income tax cut and a lower percentage sales tax increase than those at higher income levels. That’s important because we want all citizens to benefit from the changes.
As for the budget side, the plan is not totally revenue neutral for the state. The Louisiana Department of Revenue has estimated that passage of the plan in its current form would result in a short-term reduction of around $100 million to the State General Fund. That’s a significant amount, but it’s also much more manageable than the $500-$700 million fiscal cliff the state is currently facing. Elements of the plan could also be tweaked to further reduce that shortfall.
It should be noted that some are concerned that this proposal does not adequately fix a tax system that is already seen as regressive. It’s a valid argument, but killing this plan doesn’t solve that problem either. Nor does keeping the status quo do anything about the uncompetitive nature of our tax structure, its lack of transparency, or its complexity. It keeps that “worst of possibilities” described in the RESET briefing totally intact.
Finally, this proposal is not only aligned in many ways with the RESET initiative, it mirrors proposals we have seen in the tax studies of the past. Those include a major study by the Tax Foundation for the Committee of 100 in 2015 and the work of the legislatively-created “HCR 11 Task Force” on which CABL served.
No tax proposal is perfect. And there are clearly different philosophies out there when it comes to taxation. They, too, have value and other ideas should not be ignored.
But CABL believes this is a proposal worthy of strong consideration – one that addresses many of the criticisms that have been leveled at our tax system for years. Yes, there are items that give even supporters a degree of heartburn. That’s why the plan will almost certainly be changed as it moves through the process – hopefully in good ways.
But it should keep moving. We hope lawmakers will approach this effort seriously, weigh the flaws in our current system versus the improvements we could make, and pass something that moves the needle in a positive direction. There are a lot of things the Legislature does that have little impact on the future trajectory of our state. Getting this right would be something that makes a difference.