Part II: Chapter Two
Serious Money: Taxation in Louisiana
As a Louisiana politician once said when sitting down to address inquiries at a legislative committee hearing, “The answer is money. Now, what’s the question?”
Indeed, money would seem to be the most pervasive preoccupation of government. As sure as death, taxes are the inevitable reality of government operations. But not all structures of taxation get the same results. How do you construct a tax system that applies as little friction as possible on the free workings of the economy, and that treats most taxpayers fairly?
This chapter looks at the constitutional dimensions of tax policy in Louisiana and recommends improvements through a constitutional revision. The ultimate purpose of these recommendations is not to embed a new specific tax reform into our state Constitution. The intention is to develop a more foundational constitutional document that allows the tax system to be reformed and modernized over time through statutory changes.
Tax scholars have described Louisiana as having a “very constitutionally motivated” tax structure. The Louisiana Constitution authorizes governments to impose and collect certain categories of taxes, such as state individual and corporate income taxes, local and state sales taxes and property taxes. The Constitution also imposes limitations on state and local governments’ ability to tax, primarily through mechanisms such as numerical caps on rates of taxation and mandatory exemptions and deductions. Although significant changes to Louisiana’s tax structure can be achieved through statutory revisions, key structural changes require a constitutional amendment approved by the electorate.
Ideally, government revenue streams should be predictable and stable. State officials and legislators must be able to forecast with reasonable assurance the amount of revenue that will be available to finance the state’s fiscal obligations, and individuals and businesses must have some level of confidence regarding the tax implications of their decisions and investments. Wealth, economic cycles and industry diversity all play a role in determining the stability of a revenue base.
“Articles VI (Local Government) and VII (Revenue and Finance), together with Title 47 of the Louisiana Revised Statutes, dictate the basic structure and operation of Louisiana’s tax system.”
The tax structure, too, should contribute to predictability and stability, and it can most effectively do this by applying taxes broadly and fairly. In Louisiana, generally that has not been the case. We tend toward high tax rates with large offsets. This structure creates the appearance of an uncompetitive tax environment when in fact the overall tax burden is relatively low to average. But not necessarily low for all taxpayers. To fix this, the laws underpinning a tax system should be flexible enough to allow lawmakers to design and modify the structure to achieve the qualities of a good and strong revenue code – one that is broad, fair, simple, transparent, competitive and stable.
The recommendations in this Chapter seek to achieve balance by removing some of the Constitution’s detailed mandates and restrictions while leaving in place provisions that reflect more fundamental principles about the role of taxes and financial controls in the state’s overall fiscal landscape. The recommendations also aim to achieve an additional goal: a fairer, simpler and more transparent tax code that is easier to understand and to comply with, both for individuals and businesses.
Government and business leaders, policymakers, taxation experts and many citizens have long decried Louisiana’s tax code as overly complex and unpredictable. It has more than 80 individual income tax exemptions and about 200 sales tax exemptions (some of which are temporarily suspended). Most are authorized by statute, but others, including many of the most expensive exemptions and deductions, are mandated by the Constitution. This long list of exemptions and deductions built into our current tax structure has eroded both the state and local tax base and, in turn, necessitated higher overall tax rates to raise the revenue needed to support public services. A tax structure that fosters instability is also one that invites intermittent calls for tax increases.
Over the years, PAR and other organizations and policy analysts have advocated for comprehensive reform to the Louisiana tax code, including an elimination of some exemptions and deductions and lower tax rates across the board. Most recently, PAR’s president and two of its board directors served as members of the Task Force on Structural Changes in Budget & Tax Policy. The Task Force was created by the Louisiana Legislature in 2016 to make recommendations for permanent changes to the structure and design of the state’s budget as well as the state’s tax policies for individuals and businesses. In its final report, the Task Force offered 15 major recommendations for achieving a tax structure that is “fair, simple, competitive with other states, and stable over the short and long term.” Key parts of the Task Force’s recommendations, many of which are consistent with the recommendations in this report, would require amending the Constitution.
So, for this Chapter, let’s look at the Louisiana tax structure, identify the constitutional elements, and make some recommendations.
The Louisiana Tax Tour
Louisiana’s revenue structure is an evolving mix of resources. The sales tax is the leading revenue generator for the state and many local governments, followed by an income tax that has grown proportionally over time. State and local governments receive a variety of gambling taxes, including those on casinos, video poker, race tracks and lotteries. Insurance premium taxes are a major contributor. Oil and gas taxes have declined in importance over the years.
The hallmark of Louisiana taxation is that we have relatively high rates and narrow bases. A tax rate is the percentage that determines the extent to which someone or something is taxed, whereas the base reflects who or what is subject to a tax. The base is narrowed by various tax breaks and exclusions. Louisiana features many such offsets that narrow the base of its sales, income and property taxes.
The sales and income taxes along with property taxes are the most significant tax types with constitutional ramifications. Article VII of the Constitution houses the state tax considerations while Article VI includes some key local taxation matters. What follows is a quick tour of the major points and constitutional consequences of the various tax types.
The Sales Tax Reigns
At the state level, Louisiana relies heavily on sales and use taxes, which account for about one-third of the state’s overall revenue. For simplicity we will refer to this category as the sales tax. According to the most recent data available, Louisiana ranks No. 3 nationally for relying on sales tax collections as a percent of total state and local tax collections. That’s no surprise, because Louisiana has the distinction of having the third highest average combined state and local tax rate in the nation, at 9.45%, right behind the top two at 9.47%.
To address a major shortfall in the state budget, Louisiana increased the state sales tax rate from 4% to 5% in 2016, followed by a lowering of the rate to 4.45% in 2018. Sales taxes were chosen for an increase partly because, unlike some other tax types, they can produce large and immediate revenue gains with higher rates. The sales tax rate will reduce to 4% in 2025. The local sales tax rate varies depending upon the jurisdiction and in most areas is 5% or close to it.
Louisiana is unusual in having an abundance of sales tax exemptions, numbering about 200. Importantly, the Legislature in 2018 temporarily removed about 100 statutory sales tax exemptions until 2025. The state will face a decision in the coming years of whether to get rid of those exemptions permanently. Collectively, sales tax exemptions erode the tax base, which in turn requires the state to impose higher rates to collect the desired amount of revenue. They also add significant complexity to the system both for businesses who collect sales taxes from consumers and for officials who administer the system.
Sales taxes tend to be more regressive and place a greater proportional burden on people with lower incomes than the income tax and property tax. But that burden is lessened by state sales tax exemptions on food for home consumption, prescription drugs and residential utilities. These key tax breaks – which are among the largest state tax breaks available in Louisiana – are aimed at individuals and families, not businesses. Local governments have the option of taxing food and nearly all the locals do so.
The Louisiana Constitution grants the Legislature authority to charge sales taxes and allows state statutes and regulations to make the distinctions of which goods and services are eligible. However, the Constitution imposes several important restrictions with significant fiscal impacts, both at the state and local levels.
In 2002, voters statewide approved the “Stelly Plan” that swapped lower sales tax revenue for higher income tax revenue. After Stelly, food for home consumption and residential utilities were granted an exemption in the state Constitution. Prescription drug sales taxes, which were already prohibited by statute, were given a constitutional-class exemption. These three exclusions account for approximately $1.1 billion in value, according to state estimates for fiscal year 2019.
The Constitution also prohibits imposing a sales tax on gasoline or diesel fuel, instead limiting taxes on these products to a per-gallon excise tax specified in Title 47 of the Louisiana statutes. This exclusion was added to the Constitution in 1990 when the excise tax was raised from 16 cents to 20 cents per gallon. The exclusion is estimated at $323 million in value for fiscal 2019. Combined, all four of these constitutional exemptions add up to a value of about $1.5 billion in lost revenue, or nearly 40% of the state’s actual sales tax collections. Total constitutional and statutory exemptions amount to about $2.4 billion. While PAR would not recommend ending all sales tax exemptions, these figures demonstrate that sales tax rates could be reduced significantly to offset the removal of some exemptions.
The Income Tax Grows
The individual income tax is Louisiana’s second major revenue source. These are paid by individuals, families and many businesses that do not file under the corporate income tax. The upper bracket rate is 6%, which is higher than 33 other states and is an outlier in the Southeast. Even more so than the sales tax, Louisiana’s reliance on income taxes has grown significantly over the past several decades. In 1981, just 5% of Louisiana’s overall tax revenue came from the individual income tax compared to nearly 30% now.
The state’s reliance on personal income taxes also reflects recent changes to federal income taxes, which were reduced by Congress under President Trump. Because Louisiana’s Constitution carries a mandatory deduction for federal income taxes paid, the federal decrease resulted in smaller deductions for Louisiana state income filers. That meant an increase in Louisiana’s state income tax collections. That federal tax change is temporary. Weighing its high rate against its large offsets, Louisiana’s individual income tax is not unusually burdensome compared to many other states that have an income tax.
There is no widely agreed-upon magic balance of the amount of sales-tax versus income-tax revenue that should be achieved to create the best tax system. The proportions do not have to be equal. However, if the state is much more dependent upon one type than the other, then disturbances in the chief revenue type can have disproportionate effects on state receipts. Also, income taxes, if progressively structured, will tend to grow more over time than sales taxes. For example, the Legislative Fiscal Office estimates that sales tax revenue will grow by 7% by 2023, whereas the individual income tax will rise by 11% in that time.
Article VII of the Louisiana Constitution grants the Legislature authority to impose an individual income tax as well as a corporate income tax:
Section 4.(A) Income Tax. Equal and uniform taxes may be levied on net incomes, and these taxes may be graduated according to the amount of net income. However, the state individual and joint income tax schedule of rates and brackets shall never exceed the rates and brackets set forth in Title 47 of the Louisiana Revised Statutes on January 1, 2003. Federal income taxes paid shall be allowed as a deductible item in computing state income taxes for the same period.
The Constitution also expressly prohibits local governments and taxing authorities from levying an income tax. (Art. VII. § 4(C)) In this regard, Louisiana is fairly typical since fewer than half the states allow local governments to impose their own personal income tax.
All but seven states impose a tax on individual income. Like most other states, Louisiana’s income tax is graduated, meaning the rate goes higher as the person’s income moves up from one income bracket to the next. That means people with lower incomes pay an overall lower percentage of their income in taxes than do people with higher incomes. Since before 1974, Louisiana has imposed three distinct income tax rates and brackets. While the specific brackets for taxpayers have changed over the years, the rates of taxation for each of those brackets have remained constant at 2%, 4% and 6%.
The original 1974 Constitution capped personal income taxes at the rates and brackets in effect on January 1, 1974. However, in 2002, as part of the “Stelly Plan,” named for Rep. Vic Stelly, voters approved a set of major changes to both the state sales tax and individual income tax. In general, the plan sought to swap less sales tax revenue for more income tax revenue by constitutionally prohibiting the state from taxing three major sales tax categories of goods and services: food for home consumption, prescription drugs, and residential utilities. Prescriptions were already untaxed under statute.
Also, the Stelly Plan changed the individual income tax brackets to increase progressivity and eliminated federal excess itemized deductions as a deduction on the state income tax. The plan kept existing income rates of 2%, 4%, and 6%, but widened the tax brackets for the lowest income taxpayers and reduced the brackets for taxpayers making over $25,000. All in all, the Stelly Plan produced a more progressive tax system and constitutionally capped incomes taxes at the new rates and brackets approved in 2002. Income tax revenues grew steadily from 2002 to 2007.
In the wake of Hurricanes Katrina and Rita and the windfall of new state revenue from economic recovery activity, the Legislature decided to reverse the Stelly income tax changes. Under Governor Kathleen Blanco, the state reestablished the excess itemized deduction in 2007. The following year, during Gov. Jindal’s first year in office, the Legislature expanded the tax brackets to pre-2002 levels. No changes have been made to either the brackets or rates since.
The Ineluctable Deductible
Despite its short length, the Constitution’s income tax provision contains another very significant mandate. Since 1974, the Constitution has required that taxpayers, both individual and corporate, be allowed to deduct 100% of their federal income tax liability from their adjusted gross income for state income tax purposes. The deduction inextricably ties the tax liability of Louisiana taxpayers, and ultimately the state’s revenue outlook, to changes in the federal tax code made in Washington, D.C.
Only two other states, Alabama and Iowa, provide a deduction similar to Louisiana’s, and in both those cases the deduction is mandated by statute, not their constitutions. Three other states — Missouri, Montana, and Oregon — also allow a deduction for federal income tax liability but limit the deduction to around $5,000 per taxpayer.
The federal income tax deduction lowered Louisiana’s individual income tax revenues by $744 million in fiscal 2019. That figure is down slightly since the federal income tax reductions passed in 2017. Because the cumulative financial impact of the federal income tax deduction is so large, tax rates must be higher to offset the loss of revenue. Thus, almost all proposals in recent years to lower income tax rates have also included eliminating the deduction for federal tax liability.
As noted earlier, Louisiana taxpayers also can reduce their state taxable income by the amount of their excess itemized deductions on their federal form. But fewer people have been able to exploit this state tax deduction after the federal tax changes, which increased the federal standard deduction and disallowed certain types of write-offs. With less to deduct on their state forms, many Louisiana taxpayers got a higher state tax bill. As a result, income tax revenue grew. Although it was originally part of the Stelly Plan changes, the excess itemized deduction is a statutory matter, not a constitutional one.
By capping income tax rates and brackets and mandating a state deduction for federal income taxes in the Constitution, Louisiana has all but guaranteed that no significant changes to the state’s income tax policy can be achieved without amending the Constitution. The Legislature would need greater flexibility to adjust to changing fiscal conditions, including thorough changes to the state’s tax policies.
Oil, Gas & Other Mineral Revenue
Energy money used to be king in Louisiana. In 1981, mineral revenues constituted over 40% and sales tax revenue constituted just over 20% of Louisiana’s budget. Due to declining oil and gas activity and growing income tax revenue from higher paid workers in the state, mineral revenues today only account for approximately 6% of total tax receipts. The state’s lower dependence on energy taxes is generally viewed by tax experts as a positive development that has reduced the state’s vulnerability to what was once a volatile source of revenue. After all, the oil collapse of the 1980s brought an economic depression to Louisiana and a massive restructuring of the state’s fiscal policy. The Constitution contains a host of specific instructions on how mineral revenues must be appropriated; much of this revenue does not go into the State General Fund. The restrictions often depend on how and where the revenue was generated. (See Chapter Three.)
Excise license and other insurance taxes make up about 8% of state revenue, at nearly $1 billion annually. Some of these premium taxes have been applied to Managed Care Organizations that provide publicly funded coverage for Medicaid enrollees. This use of the premium tax essentially works as a state match to draw down a great deal more money from the federal government to pay for Medicaid programs in Louisiana, including the adult Medicaid expansion program. Some insurance taxes, therefore, are strongly embedded into the state budgeting process.
Tax reform proposals generally have not sought constitutional changes to address premium taxes. Louisiana allows insurance companies to offset their corporate income tax liability with a credit for premium taxes paid, but this tax policy is statutory, not constitutional. Louisiana’s rate structure creates so-called “retaliatory” insurance taxes, which some say has a negative impact on economic development, but this is not a constitutional matter.
In somewhat oxymoronic fashion, Article XII of the state Constitution says, “Gambling shall be defined by and suppressed by the Legislature.” In fact, that statement and a one-sentence prohibition on lotteries were the only thing the 1974 Constitution had to say about gambling. But no one these days would be shocked – shocked! – to find that gambling is going on here. Louisiana is one of only two states that permit such a broad scope of gambling, including a land-based casino, riverboat casinos, video poker, horse racing, racetrack slot machine “racinos”, raffles, bingo, Keno, fantasy and sports bets and nationally and state-run lotteries. Plus, we have several large tribal casinos. Alas, there is no dog racing.
Since 1974, constitutional amendments have authorized lotteries and local referendums allowing parishes to permit forms of gambling. A legal interpretation that casino “gaming” is not “gambling” aided legislation that expanded the industry. The state and many local governments now rely on gambling tax revenue. Recent efforts to increase gambling revenue have centered less on the idea of raising tax rates and more on initiatives to expand gambling, loosen regulations and allow more competitive amenities and services at casinos to capture more customers. Also, sports betting has taken root and is expected to generate state tax revenue.
Although much attention is placed upon corporate income and franchise taxes, they do not represent the bulk of taxes on business. Louisiana businesses pay about half of all sales taxes, the majority of property taxes and many local and state regulatory and occupational licensing fees. The largest set of sales tax exemptions apply to food, prescription drugs and residential utilities, all of which mainly benefit households rather than companies. Many companies and partnerships, including some large operations, pay substantial revenue to the state by filing through the individual income tax.
Taken separately, corporate income and franchise taxes account for about 4% of Louisiana’s total net tax receipts, which is a normal amount compared to other states with comparable income taxes. Louisiana’s upper rate for corporate income tax is 8%, which is higher than 37 other states, including all the states in the competitive Southeast. The high rates should not be surprising, because Louisiana’s corporate tax structure includes a list of exemptions, credits and rebates, including very costly ones, that significantly lower the state’s net tax receipts. The high rates and exemptions, along with economic cycles, contribute to volatility in corporate tax revenue.
The state Constitution allows corporate income tax filers to deduct their federal tax bill from their state corporate income, just as it does for individual income tax filers. This deduction is greatly more favorable to some corporations than to others. That means a removal of the federal deduction in favor of a lower tax rate would create winners and losers among Louisiana corporations.
Our Dubious Local Tax Base
Louisiana’s local governments, which are not permitted to impose an income tax, rely more heavily on local sales taxes than most local governments in other states. At 5%, Louisiana’s average local sales tax rate is the second highest in the nation, narrowly behind Alabama, according to the Tax Foundation. In Baton Rouge the local rate is 5.5%. Louisiana is one of only five states where the average local rate is higher than the state sales tax rate.
By comparison, local government property tax collections in many places in Louisiana are relatively meek, due to the homestead exemption, an assessment freeze for seniors and other breaks enshrined in the state Constitution. Nearly half of the state’s parishes have 49% or more of their homesteads 100% exempted. Local governments can raise the millage on property assessments, and the millage rates around the state vary. But the amount of property that can be assessed is limited. Businesses pay the better part of local property taxes in Louisiana, according to a study by Tulane economist Steven Sheffrin.
On a statewide basis Louisiana’s property tax burden is low, particularly for homeowners. The most recent available comparative data from fiscal year 2016 shows that Louisiana ranks 43rd nationally in property taxes collected per capita ($887). The state ranks 42nd nationally in property tax collections as a percent of total state and local tax collections, with property taxes accounting for 23% of total collections. By contrast, our neighbor Texas receives 44% of its revenue collections from property taxes. A study by Tax-Rates.org shows Louisiana with the lowest median percentage of property tax for homeowners among all the states. As one personal finances website put it, “Louisiana is the next best thing to a state with no property tax.”
In Louisiana, property taxes support public schools at only half the national average. As a result, local governments tend to rely more on the volatile sales tax, which is less resilient than property tax revenue in economically hard times. Also, Internet commerce is complicating sales tax collections for local governments. (See sidebar on the decentralized sales tax system.)
At the local level, tax revenue sources vary widely among parishes and municipalities. Some parishes rely disproportionately on sales and use taxes to fund local services. Others, such as St. James Parish with major manufacturing and petrochemical facilities, rely more on property taxes. School systems and parish governments across Louisiana vary in their proportions of sales tax versus property tax support.
Also, business inventory is assessed for local property taxes, making Louisiana one of only 10 states to do so, according to the Tax Foundation. Four others partially tax inventory. Although “inventory” is not specifically mentioned in the state Constitution, it is assumed to be part of business property that can be assessed. Louisiana offers state tax credits to businesses that pay the local inventory tax, although this system has restrictions and limits.
Texas and Florida have high state sales taxes but no income tax. In those states, high property taxes and local responsibility for key government and social services create a culture of more independent local communities. It is not only the tax structure in these states that is different from Louisiana, but the local community responsibility for public services also. Those two states have seen large in-migrations from other states and strong job growth despite their local governments’ high property taxes.
The Louisiana Constitution allows a very limited state tax on property in addition to the local property tax, but this tax has not been authorized in statute. A state property tax has been proposed previously as a source of funding for certain dedicated purposes or to offset tax cuts in other areas. The Constitution prohibits real estate transaction taxes.
A Confusing Local Sales Tax
Article VI, § 29 of the Louisiana Constitution authorizes local governments to levy and collect their own sales and use taxes, provided that any new tax, any renewal or any increase to an existing tax must be approved by a majority of local voters. In addition to local parish governing authorities, school boards are also authorized to impose a sales tax. Thus, in many parishes, particularly those that also include municipal school districts, there are a host of local entities each imposing their own separate sales tax rate.
Altogether, Louisiana has more than 450 different sales tax jurisdictions, many of which have their own unique rate and base. Indeed, there are at least seven parishes in Louisiana that impose at least six or more different sales tax rates and another 14 that impose at least four different sales tax rates.
For the most part, local taxing authorities share a similar tax base, but local sales tax bases are not aligned with the state sales tax base. Thus, local sales tax bases can and do differ from the state sales tax base, and even within a single parish the sales tax base may vary from one governmental unit to another.
For example, while the Constitution requires that the state exclude the “Big Three” (food for home consumption, residential utilities and prescription drugs) from its sales tax base, local governments are not similarly required to exempt these items. In fact, many political subdivisions tax food. Moreover, even within a single parish, some taxing authorities may tax the items while others may not. Similarly, while the state does not tax manufacturing machinery and equipment, local taxing authorities have the option to tax these items and most parishes do.
With respect to rates, as noted above, the Constitution allows local taxing authorities to set their own rates, subject to voter approval. However, for any local authority wishing to raise its sales tax above 3%, the Constitution requires that the Legislature must first approve the tax increase before it goes to local voters for their approval. Under this system, most local jurisdictions have raised rates to the 5% range.
In this regard, the Louisiana Constitution is an outlier. Only a handful of other states impose any caps on state or local sales tax rates. Moreover, this added layer of approval, which in effect gives legislators from one parish the power to block a sales tax increase that voters in another parish favor, not only makes it harder for local governments to raise sales tax revenue but also has the indirect effect of increasing local governments’ financial dependence on the state. This topic will be covered in more detail in Part III concerning state and local relations.
Summary and Recommendations
What if we wanted to lower Louisiana’s high tax rates without gouging the state budget? What if we wanted a tax structure that was more appealing to business investment and more competitive for economic development? What if local governments wanted a more reliable broad base of property taxes rather than a narrow base of sales taxes? What if we wanted to create a more stable state and local tax structure? What if we wanted to improve our negative rankings for having a poor tax code?
High tax rates can discourage businesses from investing and expanding and discourage workers from moving to Louisiana. Our tax system is characterized by high rates, lots of exemptions and low returns. It not only impacts individuals and families negatively but also makes Louisiana less competitive economically.
Whatever your goals for an improved Louisiana tax system, the best way to reach them in a broad and effective manner would be to revise the state Constitution. We do not have to embed a specific new tax structure into the Constitution. Preferably, we need only make Louisiana’s constitution into a truly foundation document that allows tax reforms to take place. These recommendations would help achieve that goal.
Voting Threshold Recommendation: The Constitution’s requirement of a 2/3 vote to increase taxes or eliminate tax exemptions should be retained. In addition, the creation of any new tax exemption should require a 2/3 vote. Exemptions in this context should be broadly defined to include exclusions, credits, rebates, deductions and other similar provisions.
The state needs a high bar and large consensus to warrant an increase in taxation, and so the current 2/3-vote standard should be kept. However, the primary reason Louisiana has such high tax rates is the extensive use of various types of exemptions, which narrow the tax base. The large number of exemptions has also led to a complex tax code that is difficult to navigate, particularly for businesses. Establishing a higher standard to add new exemptions to the tax code will not only help create a simpler, fairer tax code but will also help achieve the larger goal of moving to a broader base and lower rates.
Income Tax Recommendations: Remove the existing constitutional caps on income tax rates and brackets. Consistent with the current Constitution, a 2/3 vote of the Legislature would still be required to increase any taxes, including through changes to individual tax brackets.
The current Constitution caps income tax rates and brackets at levels approved in 2002. (Art. VII, § 4) This limitation restricts the Legislature’s ability to adjust income taxes as part of comprehensive tax reform. The most adaptable and foundational approach would be to eliminate limits on rates and brackets. To the extent that future legislators or convention delegates wish to preserve some form of limitation on income taxes, care should be taken to apply simple methods that are as unrestrictive as possible, such as a single cap versus multiple caps on brackets and rates. Besides, the goal of many reformers has been to achieve lower rates offset by reduced deductions and exemptions.
Transfer the mandatory state income tax deduction for federal income taxes paid to statute to provide the Legislature greater flexibility to adjust or remove the exemption with a 2/3 vote. The current Constitution mandates this deduction. Moving the provision to statute would better enable comprehensive tax reform that seeks to achieve a broader base and lower rates. As part of this step, the Legislature should be required to mount a 2/3 vote to adjust or eliminate the deduction. Strong consensus should be obtained for such major changes. This move would allow the Legislature to lower income tax rates across any or all brackets. Valued at more than $800 million, the deduction’s removal could be applied to lower rates, offsetting reductions of other tax types or higher revenue. If proponents of this idea wanted to reinforce their intentions, they could propose that any partial or full removal of the deduction would have to be joined by a reduction in income tax rates or other tax types. Given the magnitude of this fiscal impact, almost all major tax reform proposals have included eliminating this mandatory deduction. This change would grant the Legislature greater flexibility to decouple Louisiana’s income tax base from federal tax changes. The current system adds volatility to the state’s long-term revenue outlook and ties revenue wins and losses for the state to decisions in D.C. that state officials have no control over.
Sales Tax Recommendations
Some of the changes necessary to streamline and improve Louisiana’s sales tax regime may be accomplished by statutory changes that do not require a constitutional amendment. For example, in order to achieve lower rates, the Legislature should continue to broaden its sales tax base by permanently eliminating the approximately 100 exemptions that have been suspended temporarily and identifying additional exemptions to abolish. Adding certain services that are taxed in surrounding states to the sales tax base could also be accomplished statutorily and could offer the state an opportunity to lower overall rates.
However, achieving real uniformity and more simplicity in Louisiana’s sales tax regime will require amending Articles VI and VII of the Constitution to bring exemptions and exclusions in line at the state and local level, provide the state with flexibility to adopt a uniform system of sales tax collection and administration and to enable local governments to become less dependent on sales tax revenue to support local functions.
Transfer the “Big Three” sales tax exemptions to statute. This change will provide the Legislature greater flexibility to remove the exemptions with a 2/3 vote and lower the tax rate. The current Constitution mandates three major sales tax exclusions for food for home consumption, residential utilities and prescription drugs (the “Big Three”). (Art. VII, § 2.2) Altogether, these exclusions cost the state approximately $1.1 billion in lost tax revenue. Moving the Big Three back to statute would provide the Legislature greater flexibility to remove one or more of the exclusions and lower the state sales tax rate accordingly.
Remove the constitutional barrier to a more centralized sales tax collection system. The current Constitution requires that each parish have a single tax collector for local sales taxes. This system is burdensome for businesses and places Louisiana at a disadvantage when attracting and growing business. (Art. VII, § 3) Removing the mandate from the Constitution will give the Legislature greater flexibility to implement a more uniform and centralized system of sales tax administration, collection and audit that is easier for businesses to navigate and helps ensure Louisiana’s collection of online sales taxes is consistent with current legal requirements.
A transition to a new system would be complex and would take time. As part of the deal in moving to a centralized system, the state could consider a hold-harmless provision to ensure local governments are not financially short-changed.
PAR also recommends moving to a more uniform state-local sales tax base so that the same set of goods and services are taxable at the state and local level. This uniformity would not have to be perfect, but changes in this direction would simplify Louisiana’s tax code and ease the burden on businesses operating in multiple tax jurisdictions.