Note: This is the testimony of Manish Bhatt, a Senior Policy Analyst at the TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Foundation’s Center for State Tax Policy, presented before the Louisiana House Ways and Means State Tax Structure Subcommittee hearing on October 3, 2024.
I am Manish Bhatt, Senior Policy Analyst with the Tax Foundation’s Center for State Tax Policy. Established in 1937, the Tax Foundation is a nonpartisan and nonprofit organization focusing on tax research and education at global, federal, and state levels. Today, I am pleased to address Louisiana’s House Ways and Means State Tax Structure Subcommittee and welcome any questions regarding sound tax policy principles—simplicity, transparency, neutrality, and stability.
Currently, Louisiana’s tax code includes several inefficient policies that hinder the state’s competitive edge. I will outline how Louisiana can learn from nationwide tax trends and proposed reforms to enhance the quality of life for its residents. Governor Landry’s recent proposals, among others, are part of this discussion. Tax competition is a reality, with Louisiana contending for investments and residents regionally and nationally. The Tax Foundation’s annual State Business Tax Climate Index (Index) ranks states based on tax structure and competitiveness, using five components: individual income taxes, sales taxes, corporate income taxes, property taxes, and unemployment insurance taxes. States are weighted based on variability, with those foregoing major tax categories, like individual income or sales tax, weighted differently compared to those including property and unemployment insurance taxes.
Despite these challenges, states like Utah and Indiana balance comprehensive taxation with high competitiveness, as evidenced by their top 10 Index rankings.
Louisiana’s tax code ranks 40th overall in the latest Index, with only property and unemployment insurance tax components within the top 25 segments. However, the state has made strides in tax reform by reducing franchise tax rates, abolishing the throwback rule, and adjusting economic nexus sales requirements. Louisiana shares its net out-migration status with states like New York and California. Yet, my colleague, Andrey Yushkov, reports Texas witnessing growth in urban regions despite overall migration negativity—something Louisiana should consider.
While taxes alone don’t dictate migration, they are critical in attracting and retaining people and businesses. Aligning closer to sound tax principles can bolster Louisiana’s competitiveness.
Emerging National Tax Trends
Recently, increased state revenues have allowed for tax relief and heightened competitiveness. Since 2021, 28 states have decreased individual income tax rates, with 15 reducing corporate tax rates. By January 2024, 34 states witnessed significant tax changes, such as Arkansas, Iowa, and Nebraska, which cut across both individual and corporate taxes. Wyoming removed the economic nexus threshold for marketplace facilitators as of July 1, 2024. Louisiana also continues to work towards tax optimization.
There’s a surge in states opting for flat individual income taxes. Arizona started transitioning to a flat rate of 2.5% in July 2021, with Mississippi, Georgia, and Idaho undertaking similar shifts. Flat taxes not only simplify tax regimes but also better forecast revenue, proving beneficial for businesses needing predictable tax liabilities. States adopting single-rate corporate taxes, like Pennsylvania, also underscore this trend.
Evaluating Louisiana’s Proposed Tax Reforms
Individual Income Taxes
A move to a flat income tax would increase simplicity and transparency in Louisiana. It addresses bracket creep caused by unindexed tax brackets. Current treatment of S corporations is uncompetitive, needing alignment with pass-through taxation.
Corporate Income Taxes
Proposals for corporate tax reform are growth-oriented, addressing the inefficiencies of numerous incentives in favor of broader neutrality. Louisiana’s openness to permanent full expensing would significantly improve its competitive ranking.
Sales Taxes
The state should aim for unified sales tax administration to ease burdens on businesses, especially those remote or without physical state presence. Louisiana’s high local sales taxes cause challenges—streamlining these with better policy alignment and reduced compliance burdens would enhance competitiveness.
Property Taxes
Louisiana’s property tax rates are low, but the state suffers due to policies like the franchise and inventory taxes. Aligning policies to mitigate these burdens could drive substantial economic benefits, making Louisiana significantly more competitive.
Competitive Gains and Opportunities
With comprehensive tax reform, Louisiana can transition from its current bottom 10 rank to a top 10 position in the Index. These pro-growth tax policies encourage business investments and help retain residents, benefiting the entire state’s economy. I commend your ongoing efforts to provide meaningful tax relief in Louisiana and look forward to any questions you might have.
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