As Republicans in Congress move forward with efforts to pass a tax overhaul, the proposed cuts to individual and corporate rates being consideration would actually mean an injection of revenue into Louisiana’s budget.
That’s because of two tax breaks offered to people and corporations on their state income taxes. The first is called “federal deductibility,” or the unique practice of allowing people and certain businesses to write off 100% of the federal taxes they pay when filing state income taxes. Only two other states allow this deduction in its entirety, according to a tax and budget reform panel that studied Louisiana’s tax code in great detail.
Between individuals and corporations, the federal deductibility represents the single largest income tax break offered in Louisiana, at more than $1 billion in lost revenue in the 2015-2016 fiscal year alone.
The other, smaller provision is the “excess itemized deduction.” People can deduct the amount of itemized deductions that exceed the standard deduction on their state income taxes. The deduction is used more by higher-income people, while anyone who pays federal income taxes can claim the federal deduction, says Postlethwaite & Netterville Senior Tax Director Bill Potter. The reason Louisiana would see an increase in revenues if Congress cuts taxes for people or corporations is because the federal deductions Louisianans take would be worth less. Plus, if lawmakers get rid of or reduce certain itemized deductions—or entice more people to take a bolstered standard deduction instead—that would reduce the size of Louisiana’s excess itemized deduction tax break.
Both of those tax breaks are essentially lost revenue for Louisiana. Reducing their size would mean more tax revenue coming into the state.
The Task Force on Structural Changes in Budget and Tax Policy has recommended eliminating or scaling back both provisions as part of a larger overhaul of the state’s tax code that included lower rates for people and corporations. Louisiana voters rejected a measure last year that would have ended the federal deduction for corporations in exchange for a flat tax.
“If the plans stay in their current form we expect there will be some increase in state tax dollars,” says Louisiana Department of Revenue Secretary Kimberly Robinson.
Just how much more money the state would get is the unknown, Robinson adds, and depends largely on how much rates are cut. She declined to speculate what the impact would be based on proposed bills.
The increase in tax revenue would not be enough to solve the so-called “fiscal cliff,” or the more than $1 billion in temporary taxes falling off the state books next year, Robinson says. Officials will work to analyze the impact on state revenues if a tax bill passes through Congress.
Regardless of broader discussions of the winners and losers of the tax proposals, and whether a large corporate tax cut would benefit workers, Louisiana’s state revenues would probably tick upwards.
“For Louisiana overall from a revenue standpoint, this would be a windfall,” says Potter.