(The Center Square) — The Louisiana Legislature has approved a sweeping tax package aimed at overhauling the state’s tax system, pairing major income tax cuts with sales tax increases and the elimination of many tax breaks to balance the budget.
On Thursday, the Senate was in a frenzy to amend the bills to the satisfaction of the legislators.
Originally scheduled to convene at in the early afternoon, the Senate didn’t make a peep until just after six. When they did convene, it was only to announce that they would adjourn, buying senators more time to comb through the bills and find the consensus needed to push the reforms through.
On Friday, the Senate passed each bill by wide margins. Most notably, the legislature has combined two of the most important bills − House bills 1 and 10.
House Bill 1 is projected to reduce state revenue by $1.3 billion annually while raising $845 million through higher sales taxes.
Under HB 10, the state sales tax rate will increase from 4.45% to 5% beginning in January 2025. The higher rate will remain in place for five years before dropping to 4.75% in 2029.
Senate President Cameron Henry, R-Metairie, noted the additional 1% tax includes business tax breaks, meaning it will generate less revenue than initially estimated. The higher sales tax revenue is intended to offset the cost of reducing the individual income tax to a flat 3% rate.
The Democrats were apprehensive and combative to most of the bills throughout the two-and-a-half week special session, worrying that the tax burden is shifted from the wealthiest individuals and corporations and onto the less wealthy individuals.
Indeed, as far as dollars go, wealthier individuals will see a greater cut, but context is needed.
“A flat income tax is inherently the most fair − everyone pays the same rate. Of course that means that those who have been paying more under a progressive structure will see the largest reductions,” Daniel Erspamer, the CEO of the Pelican Institute, said. “But every taxpayer will get a cut, and every family’s first $25,000 of income will be tax free. This benefits the lowest income families in our state.”
The income tax reduction is only half the story. The second half is the sustained economic growth across the reforms will inspire in Louisiana.
“Louisiana has traditionally had one of the most complex codes in the country,” Erspamer said. “It’s expensive and challenging to comply with it and artificially inflates the rate.”
Small businesses cannot afford the entourage of accountants and lawyers needed to navigate the code, which has been pushing many businesses out of Louisiana.
As previously reported, Jonathan Williams, executive vice president of the American Legislative Exchange Council, told The Center Square that Gov. Jeff Landry’s tax plan mirrors the principles of 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 stressed the need to boost Louisiana’s business appeal to address the ongoing population decline. Williams noted that neighboring states like Mississippi and Arkansas have recently enacted comparable reforms, warning that Louisiana risks falling further behind if it doesn’t act.
Put simply, the income tax cut needs to be considered in the broader context of the economic boom it would create.
“Our modeling suggested that together it would yields something like 4.5 billion economic activity and between 4,000 and 5,000 jobs,” Erspamer said.
The combined bill retains tax credits for historic preservation, film production, and research and development, though with reduced caps. The inventory tax credit for individuals and corporations will also remain but is set to sunset earlier than previously planned.
In addition to HB10, the Senate approved HB 2, which lowers the corporate tax rate from 7.5% to 5.5%. Proponents say the move will enhance Louisiana’s business climate and make the state more competitive for economic development.
To address revenue shortfalls caused by the income tax cuts, lawmakers voted to redirect $280 million in vehicle sales tax revenue to the general fund for two years. This shift will delay funding for major infrastructure projects, including the Interstate 49 North and South corridors and a new Baton Rouge bridge spanning the Mississippi River.
“Sen. Henry, Speaker DeVillier and I have committed to the people of Louisiana that we will ensure the necessary funding to finish I-49 North, I-49 South, the Calcasieu River Bridge, and the Baton Rouge Bridge,” Landry said on X.
While several measures advanced, HB 9, which proposed expanding the sales tax base to include 41 new services died before it could reach the Senate.
HB 9 was expected to generate over $500 million. Likely, the increased sales tax rate was implemented to make up for the bills revenue.
The tax package now heads back to the desk of Gov. Landry.
Many of the bills are tied to HB 7, which rewrites Article 7 of Louisiana’s constitution. Tied to HB 7 is the permanent school employee pay raise of $2,000, the income tax rate reduction and the doubling of the standard deduction.
“Today is a huge step in the right direction,” Landry said in a news release, though adding that there was work to do. “This tax package is a win for the people of Louisiana. It is a win for the businesses in Louisiana.”
