(The Center Square) — An independent analysis of Gov. Jeff Landry’s proposed tax reform, conducted by economist Greg Albrecht and commissioned by the Public Affairs Research Council, sheds light on the administration’s sweeping plan.
According to the analysis from the Louisiana Public Affairs Research Council, while higher incomes see larger tax cuts in terms of dollar amounts, the percentage decrease in tax liability is generally greater for lower-income earners.
The Louisiana Legislature is poised to review a significant tax overhaul proposed by Landry, called the “Louisiana Forward” initiative. This plan includes 10 bills designed to simplify the tax system while promoting economic growth and protecting low-income earners.
Key proposals involve a flat 3% individual income tax rate with standard deductions of $12,500 for single filers and $25,000 for joint filers. The sales tax reforms aim to include digital products and services, eliminate local tax exemptions for prescription drugs and manufacturing machinery, and redirect a portion of the sales tax to the general fund.
The expected fiscal impact of these changes is between $840 million and $860 million, making Louisiana’s tax system more competitive and equitable.
Around 54% of the total tax savings will benefit the top 10% of earners—those making $150,000 or more. Meanwhile, the other 46% of the tax cut will go to the remaining 90% of households with lower incomes.
Income tax
Imagine two families in different income brackets. One family earns $35,000 a year and another makes $650,000. Under Landry’s tax proposal, the the first family would see their annual tax bill drop by almost 50%, saving them around $338.
Meanwhile, the second family that earned $650,000 would get a tax cut worth over $7,000, but that represents only about a 28% reduction. So, even though the second family saves more in dollars, the tax break means a bigger difference, percentage-wise, for families like one with $35,000 in annual earnings.
However, since wealthier individuals currently pay more taxes overall, they will still receive the largest portion — 54% — of the total tax cut. Businesses, which often pay taxes through individual tax returns rather than corporate taxes, will also benefit from these reductions.
The study also notes that these changes may make it look like some low-income filers are getting bigger cuts than they actually are, because business income and losses are sometimes reported on individual returns.
While tax cuts may lead to immediate savings for higher earners, the long-term impact may help to facilitate more economic growth within Louisiana. Jonathan Williams, the executive vice president of the American Legislative Exchange Council told The Center Square that Landry’s proposals reflect Donald Trump’s 2017 Tax Cuts and Jobs Act.
“What happened overall was we saw so much economic growth and new investment in the United States, new business development, and you saw a scenario where the federal tax code actually became more progressive after the Trump tax cuts than before,” Williams said. “It’s really important to look at not just the initial distributional analysis and effects that are projected, but also what it means long term for the competitiveness of the state”
Landry’s administration has emphasized the importance of making Louisiana more attractive to business and reversing the state’s out-migration trend. Williams highlighted recent reforms in Mississippi and Arkansas have made similar reforms and Louisiana may continue to get left behind.
“Louisiana’s tax code, among other elements of its business and kind of competitiveness policy, have been really an outlier that caused individuals to move out of state,” Williams said.
In recent testimony before the Louisiana House Ways and Means Committee, Williams emphasized that good tax policy included low rates and a broad base, which is hard to manage if people are leaving the Pelican State in droves.
Williams applauded Landry’s proposed reforms, though conceded the state still has work to do.
“It puts Louisiana back in competitive position, especially with Mississippi and Arkansas and Alabama and other states in the region,” Williams said.
According to Secretary of the Louisiana Department of Revenue Richard Nelson, much of the tax plan has been modeled off of changes made in North Carolina.
Like North Carolina, Landry hopes to eventually phase out the income-tax completely. Landry is also leading the charge against the state’s vulnerability to budget deficits, which he called a “disease”.
“The in-migration [in North Carolina], the new business investment that they’ve seen has more offset some of the losses that were projected, where year over year, they continued to realize budget surpluses after this kind of period of tax cutting,” Williams said. “I remember a particular budget year where North Carolina was able to give, I think, a nine or nearly 10% increase in pay to state teachers because of the surplus money with all this new business investment coming into the state.”
SALES TAX
Since the state will now lose a lot of revenue from income taxes, Landry’s administration is proposing to make up that loss by an expansion of taxed goods and services.
The brunt of that expansion will come from digital goods and services, much of which have gone untaxed as the world has entered the digital age.
In a recent news conference, Landry emphasized that the administration wanted to prioritize taxing people’s choices instead of their labor.
According to the analysis, households earning between $30,000 and $40,000 would face a 29% rise in annual sales tax payments, averaging around $96.
In contrast, those making between $600,000 and $700,000 would see a 36% increase, or about $826 more each year.
This structure slightly reduces the regressive nature of the state’s current sales tax system, which tends to place a heavier burden on lower-income earners. Higher-income households, which tend to spend more, will shoulder a larger share of the tax hike — around 37% of the total increase, according to the report.
Another important aspect of the plan is that Louisiana residents will not bear the full weight of the sales tax increases. The report estimates that less than half of the additional revenue from the sales tax changes will come from Louisiana households. The rest will likely be paid by nonresidents, tourists, and businesses, easing the burden on local taxpayers.
COMBINED EFFECT
The proposed changes to the state’s income and sales taxes are expected to result in a net tax cut for most households.
According to the report, the income tax cuts included in the governor’s broader tax reform plan will generally outweigh the increase in sales tax payments. Around 1.08 million households are projected to see their combined income and sales tax liability decrease by 20% or more, with most of those households earning between $15,000 and $80,000.
There would be 151,000 low-income households up to $10,000 would see a slight increase in their taxes, despite generally paying little to no income tax under the current system.
For this group, the rise in sales tax outweighs the benefit of the income tax cuts, with the overall increase averaging between $9 and $29 annually.
“Both the percentage of liability and the absolute dollar amount of the tax increase gets larger as income rises,” PAR said in the report. “Thus, the proposed changes in sales tax appear to slightly reduce the overall regressivity of the state sales tax as compared to the current system.”
According to the analysis, households earning between $30,000 and $40,000 would face a 29% rise in annual sales tax payments, averaging around $96.
In contrast, those making between $600,000 and $700,000 would see a 36% increase, or about $826 more each year.
Another important aspect of the plan is that Louisiana residents will not bear the full weight of the sales tax increases. PAR estimates that less than half of the additional revenue from the sales tax changes will come from Louisiana households. The rest will likely be paid by nonresidents, tourists, and businesses, easing the burden on local taxpayers.
A TALL ORDER
Landry is expected to call a special session to push the 10 bills through. Those 10 bills make up over 500 pages and include a constitutional amendment.
A special session leaves just ten days for the Legislature to consider, debate and vote on the reforms. Some wonder why the administration wouldn’t wait until the Legislature’s designated fiscal session.
“The Legislature can solve the fiscal cliff, and the time to solve this fiscal cliff is during the regular session coming up next year, when we have a fiscal session of the legislature,” Jan Moller, the executive director of Invest in Louisiana, recently told The Center Square. “There’s no reason why this has to be done in a special session in November, during the holiday season, when people in Louisiana are used to focusing on anything and everything except the state legislature doing this in a two-week time span.”
