Louisiana's Tax Code Reform: A Path to Competitiveness and Growth

Louisiana's current tax code features several inefficient and uncompetitive policies, resulting in the state falling behind in tax competitiveness and economic growth. Manish Bhatt, a senior policy analyst with the Center for State Tax Policy at the Tax Foundation, recently addressed these issues and proposed reforms that could enhance the lives of Louisiana's residents and boost the state's economic standing.

Louisiana's Current Tax Standing

In the latest Index, Louisiana ranks 40th overall. While the state performs moderately well in property tax and unemployment insurance tax components, there is significant room for improvement. Recent legislative efforts have aimed at reducing the franchise tax rate, eliminating the throwback rule, and reforming economic nexus for sellers without physical presence in the state. However, these measures have not been sufficient to significantly elevate Louisiana's tax competitiveness.

Migration Trends and Tax Policy

Louisiana, like New York and California, is a net out-migration state, losing residents and adjusted gross income. Bhatt emphasized that while taxes are not the sole factor influencing migration trends, they play a crucial role. Aligning Louisiana’s tax code with the principles of sound tax policy can help attract and retain both individuals and businesses.

National Tax Trends

Across the country, states have been enacting tax relief and increasing their competitiveness. Since 2021, 28 states have reduced individual income tax rates, and 15 have cut corporate tax rates. Many states, including Louisiana, have implemented reforms and rate reductions in recent years. Notably, states like Arkansas, Iowa, and Nebraska have made significant tax cuts, further highlighting the trend toward lower taxes and simplified tax codes.

Proposals for Louisiana's Tax Reform

Individual Income Taxes

Transitioning to a single-rate income tax system can add simplicity and transparency, making Louisiana more competitive. Currently, the state’s tax brackets are not indexed for inflation, causing bracket creep. Moving to a single rate would mitigate this issue and provide greater certainty for taxpayers. Additionally, Bhatt recommended reconsidering the current treatment of S corporations to align with more competitive practices seen in other states.

Corporate Income Taxes

Proposed corporate tax reforms include transitioning to a single rate and removing incentives that favor particular investments or industries. Adopting permanent full expensing could also enhance Louisiana’s regional and national competitiveness, sending a strong signal that the state is open for business.

Sales Taxes

While Louisiana has made progress in its sales tax code, it still lacks uniform sales tax administration. This disproportionately impacts remote sellers and marketplace facilitators. Bhatt suggested centralizing sales tax collection to reduce compliance burdens, particularly for small and midsized businesses. Furthermore, expanding exemptions for business inputs and aligning the state and local sales tax base could improve efficiency and competitiveness.

Property Taxes

Louisiana boasts relatively low property taxes, but the franchise tax and inventory tax diminish its competitiveness. Bhatt advocated for the repeal of these taxes to encourage investment and reduce inefficiencies. He highlighted that past legislative efforts to phase out the franchise tax were vetoed, despite acknowledgment of the tax's antiquated nature.

Competitive Gains and Future Outlook

If Louisiana enacts comprehensive tax reform, the state could see a dramatic boost in competitiveness. Had the proposed reforms been in place during the previous Index evaluation, Louisiana could have ranked in the top 10 instead of the bottom 10. Bhatt concluded by applauding the state’s efforts toward meaningful tax relief and expressed optimism that such reforms could recruit and retain more residents and businesses, fostering a pro-growth environment.

As Louisiana considers these reforms, the focus on simplicity, transparency, neutrality, and stability in its tax code could pave the way for a more prosperous future for all its residents.