Later this year Louisianans should vote in favor of a constitutional amendment not because it does very much, but because what little it does makes possible much more substantial and beneficial changes for the future.
SB 159 by Republican state Sen. Bret Allain would amend the Constitution to allow lawmakers to not permit a deduction of federal taxes paid for state income taxes and locks in a maximum state individual income tax rate of 4.75 percent. Currently, these rates in law crest 6 percent.
Three other bills, signed by Democrat Gov. John Bel Edwards, implement the ramifications of this change, which if passed goes into effect for 2022. One pares the existing three-tiered individual/fiduciary rates from 2 to 1.85, 4 to 3.5, and 6 to 4.25 percent, with the potential after 2023 for further reductions as state revenues elevate. Another reshapes corporate income rates from five to three brackets, expands the lower brackets, and lower rates to 3.5, 5.5, and 7.5 percent. The final of them keeps corporate franchise taxes – an additional tax on a firm’s capital – suspended for two more years for smaller businesses and generally reduces such rates for all businesses over time. Except for this one, for the other pair federal income taxes paid no longer becomes deductible.
It’s a baby step. Ideally, the state would collect no income taxes at all – and doesn’t get much from corporations anyway because of the myriad of deductions available, with federal income tax paid being just one of them. But if it had to levy these, they should occur at a low, flat rate. And, economically speaking, the franchise tax is a bad idea and should be dispensed with entirely; reducing it merely makes it less destructive.
Still, the passel of bills makes progress. In the first couple of years the combination would act essentially revenue neutral, and then in the next few years (starting right after Edwards’ term ends; he stated he wouldn’t sign such bills unless they produced revenue neutrality), with a five- year estimated impact of almost $69 million fewer collected.
Except for changes that cut everybody’s rates and/or increase their deductions, altering the tax code produces winners and losers. The clear losers here are filers who have a proportionally high level of deductions tied to federal income taxes, almost all of which are businesses (either pass-throughs to individuals or C corporations). The greater amounts paid out by these businesses largely will pass along to consumers, so this could eat away at savings from lower individual payments.
However, the decoupling from federal income taxes gives the state much more control over shaping its fiscal structure. Even without the companion bills, this alteration produces a salutary impact.
The overall impact of passing this amendment, which triggers these bills, is tiny if beneficial. However, the potential it unlocks is enormous. For example, since the 2015 sales tax rate increase/deductibility decrease (supplemented by those of 2016 and 2018), Louisiana has taken in too much money that has allowed it to spend on unnecessary programs. The amendment’s change could magnify flexibility in correcting this aberrance; instead of dropping sales tax rates, the surplus revenue (after cutting the needless expenditures) could be returned by further income/franchise tax rate reductions/eliminations, either through the existing statutes’ language or by further changes.
This possibility argues for an affirmative vote for the amendment, because of what can be built from it.