State tax overhaul gains momentum, but approach yet to be decided

With two weeks of the legislative session complete, Louisiana’s Republican legislative leaders have speeded ahead with a rewrite of the state’s tax system, but without a clear consensus yet emerging on the precise approach to take.

Across the remaining seven weeks of session, lawmakers will have to settle many hefty, high-dollar issues to strike a deal that overhauls a tax structure seen as outdated, overly complicated and unfair. And they may have to snub some powerful special interest groups to make the numbers work.

Senate President Page Cortez, House Speaker Clay Schexnayder and the heads of the House and Senate tax committees, all Republicans, have demonstrated their commitment to the cause by aggressively scheduling hearings on the bills and starting to move them.

So far, the concepts seem to have momentum. However, big questions remain unanswered that could determine if they can get enough votes from lawmakers in both parties, receive buy-in from the governor and persuade voters.

Do lawmakers want to charge a flat tax on individuals’ and businesses’ income, or do they want to charge different rates that gradually increase as people and companies earn more? Do they want to get rid of the corporate franchise tax or lower it? What do they want to do with the special interest tax breaks?

Key to making the tax rewrite work is keeping the package of bills “revenue neutral” so it doesn’t significantly change the dollars flowing into the state treasury.

Gov. John Bel Edwards says he won’t sign bills that cause budget shortfalls, and a provision in the latest federal coronavirus aid legislation won’t allow the assistance to flow to states that cut their taxes. Meanwhile, Republicans don’t want to pass anything seen as raising taxes.

The Democratic governor called revenue neutrality “the main guardrail that we have.”

Broad agreement has emerged from lawmakers, business groups, tax experts and government watchdogs on a core principle: disentangling Louisiana tax collections from federal tax collections.

Louisiana allows taxpayers to deduct the federal income taxes they pay from the computation of their state income taxes. That means when federal income taxes go up, Louisiana collects less in state taxes. When federal income taxes go down, as they did recently with former President Donald Trump’s tax breaks, state income tax collections rise.

“The problem is you hand over your income to the whim of the federal government” says Sen. Bret Allain, the Franklin Republican who chairs the Senate tax committee.

He said it’s time for Louisiana “to get off the roller coaster.”

All the major tax restructuring packages proposed would get rid of that deduction in exchange for lowering income tax rates, either dropping all the income tax brackets to lessened rates or replacing them with a flat tax lower than the current top tax rate.

The Senate voted 36-3 Tuesday for one piece of getting rid of the federal income tax deduction, but most major tax bills must start in the House. The full House is expected to start debating several tax restructuring measures this week.

The House tax committee, overseen by Lafayette Republican Rep. Stuart Bishop, has advanced competing bills and didn’t choose an approach between a flat tax or different tax rates tied to income levels. Instead, the full House will have to decide what system it prefers.

Edwards says he’s open to a flat tax for the corporate income tax, but doesn’t support that for individual income taxes. He says graduated rates that increase as income is higher “is the fairest system.”