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As we approach the midpoint of the fiscal year, early indications suggest tax collections are pretty close to what officials expected.
The Revenue Estimating Conference will meet next month to revisit the numbers, giving lawmakers a better idea of how the tax overhaul they approved last year is panning out.
And, perhaps, they’ll start to get a better sense of whether their dream of slashing the income tax rate to zero will be feasible anytime soon.
Of the two biggest tax sources, sales taxes are coming in about 30% higher than before the makeover, which is slightly more than was projected, Revenue Secretary Richard Nelson says. Lawmakers raised the state sales tax rate and broadened the base to include digital products, and major construction projects also helped to spur that increase.
As for the other big one, personal income tax collections are down by about $1.1 billion since Louisiana replaced its tiered system with a flat 3% rate, which is a softer hit than was expected.
However, Nelson notes that the lower income tax rate in place this year largely will be reflected in the returns people file next calendar year, so the impact on state coffers will be more evident in the back half of the current fiscal year that ends June 30.
Corporate income tax receipts are notoriously volatile and hard to predict, and this year certainly is no exception given the changes implemented nationally in the megabill President Donald Trump signed in July. Corporate collections are down significantly so far this year, more so than what was expected after implementing the new 5.5% flat rate, Nelson says.
Lawmakers scaled back tax credits, which are a big piece of that unpredictability, as part of the overhaul. But while many programs stopped accepting new applications, the state still will be paying off the previously approved credits for years to come, Nelson notes.
The REC gave legislators some good news back in May, authorizing an additional $130 million to spend during the then-current fiscal year and $139 million more for 2025-2026. But there was also a note of caution, with economists predicting a $667 million gap between revenues and expenses by 2028.
But House Appropriations Chair Jack McFarland is optimistic about state revenue. We’re still only in the first full calendar year post-tax reform, so it remains to be seen how collections will play out in this new environment, he says.
He also pointed to some $70 billion in anticipated new investments in the state that could spur economic growth and tax revenue.
“I’m optimistic that the tax reform we did is going to benefit us long term by generating more economic opportunities,” McFarland says. “People are going to spend more and invest more, because more is being put back in their pocket.”
If it turns out projections show that cuts will be needed for 2027, he says he would expect to start planning for that when lawmakers embark on the budgeting process next year. Asked about the potential for further tax cuts, he says it’s possible, though getting the personal income tax rate all the way down to zero is unlikely during the current term.
Senate Revenue and Fiscal Affairs Chair Franklin Foil says eliminating the income tax is a “great goal,” but agreed with McFarland that getting there during the current term while remaining fiscally responsible would be tough. But he said he expected to at least have that conversation before the end of the term, perhaps involving a mechanism similar to what Mississippi adopted that phases out the income tax over time.
He noted that the 2027 fiscal session also falls in an election year, “when people are going to want to make a big impact.”
Fitch Ratings recently bumped up Louisiana’s rating outlook from “stable” to “positive,” which Treasurer John Fleming says signals the state’s “improving fiscal posture.” He says the state’s budget remained relatively stable from last year to this year and investment income from state accounts has been strong.
But he says cutting income taxes further, preferably to zero, “has to be done” to compete with other states in the region that don’t levy an income tax.
“Not only do I think that’s an appropriate goal, I think it’s going to be expected by the people of Louisiana,” says Erin Bendily with the Pelican Institute for Public Policy about reducing or killing the income tax.
Just as the state tax overhaul creates uncertainty, so does the ongoing cost-cutting effort by the federal government, which provides much of the revenue that lawmakers appropriate each year. But rather than sitting on their hands, lawmakers should take the opportunity to show how they can leverage federal money more efficiently, which is what the feds are looking for in some cases, Bendily says.
“It’s an opportunity for us to say we’re going to get our fiscal house in order,” she says.
Jan Moller of Invest in Louisiana, on the other hand, says the last thing lawmakers should be trying to do is cut taxes again, pointing to the federal cuts and the national and global economic uncertainty. State government will be shouldering a bigger share of the cost of Medicaid and food assistance, and that could be true of the next natural disaster as well, he says.
“We know that budget shortfalls are coming back,” Moller says. “The governor and the Legislature are looking at one more budget cycle that’s kind of calm before the waters get more treacherous.”
