Analysis: Tax reform will result in a reduction in net tax liability for most filers

An independent analysis of Gov. Jeff Landry’s proposed tax reform, conducted by economist Greg Albrecht and commissioned by the Public Affairs Research Council, sheds light on the administration’s comprehensive plan.

According to the analysis According to the Louisiana Public Affairs Research Council, while the dollar tax cuts are larger for higher income earners, the percentage decrease in tax liability is generally larger for lower earners.

The Louisiana Legislature is poised to consider a comprehensive tax overhaul proposed by Landry called the Louisiana Forward initiative. This plan includes ten bills aimed at simplifying the tax system while promoting economic growth and protecting low earners.

Key proposals include a flat 3% individual income tax rate with standard deductions of $12,500 for single filers and $25,000 for joint filers. The sales tax reforms aim to include digital products and services, eliminate local tax exemptions for prescription drugs and manufacturing machinery, and redirect a portion of sales tax to the general fund.

The expected tax impact of these changes is between $840 million and $860 million, making Louisiana’s tax system more competitive and fair.

About 54% of the total tax savings will go to the top 10% of earners – those earning $150,000 or more. The remaining 46% of the tax cut goes to the remaining 90% of lower-income households.

Income tax

Imagine two families at different income levels. One family makes $35,000 a year and another makes $650,000. Under Landry’s tax proposal, the first family’s annual tax bill would drop by nearly 50%, saving them about $338.

Meanwhile, the second family making $650,000 would receive a tax break worth over $7,000, but that’s only a reduction of about 28%. So even though the second family saves more dollars, the tax break makes a larger percentage difference for families like one with an annual income of $35,000.

However, because wealthier individuals currently pay more taxes overall, they will still receive the largest share – 54% – of the total tax cut. Companies that often pay their taxes through individual tax returns rather than through corporate taxes also benefit from these discounts.

The study also notes that these changes could create the impression that some low-income filers are receiving larger cuts than they actually are because business income and losses are sometimes reported on individual tax returns.

While tax cuts can provide immediate savings for higher earners, the long-term effects can help spur economic growth in Louisiana. Jonathan Williams, executive vice president of the American Legislative Exchange Council, told The Center Square that Landry’s proposals mirror Donald Trump’s 2017 Tax Cuts and Jobs Act.

“What happened overall was that we saw so much economic growth and new investment in the United States and new business development, and you saw a scenario where the federal tax code actually became more progressive after the Trump tax cuts than before,” Williams said. “It’s really important to look at not just the initial distribution analysis and projected impacts, but also what it means for the state’s competitiveness over the long term.”

Landry’s administration has stressed the importance of making Louisiana more attractive to business and reversing the state’s migration trend. Williams emphasized that recent reforms in Mississippi and Arkansas have made similar reforms, and Louisiana may continue to be left behind.

“Louisiana’s tax law and other elements of its business and competition policies were truly an outlier that caused individuals to leave the state,” Williams said.

In recent testimony before the Louisiana House Ways and Means Committee, Williams emphasized that good tax policy includes low rates and a broad base, which is difficult to manage when people are leaving the Pelican State in droves.

Williams welcomed Landry’s proposed reforms but acknowledged the state still has work to do.

“It puts Louisiana back in a competitive position, particularly with Mississippi, Arkansas, Alabama and other states in the region,” Williams said.

According to Louisiana Treasurer Richard Nelson, much of the tax plan was based on changes made in North Carolina.

Landry leads the charge against the state’s vulnerability to budget deficits, which he called a “disease.”

“Immigration [in North Carolina]“The new business investment they’ve seen has offset some more of the projected losses as they continued to run budget surpluses year after year after this type of tax cut period,” Williams said. “I remember one particular fiscal year where I think North Carolina was able to give state teachers a 9 or close to 10 percent pay raise because of all this new business investment, excess money was flowing into the state.”

Sales tax

Since the state will now lose large amounts of income tax revenue, the Landry administration proposes to offset that loss by expanding the goods and services taxed.

The brunt of this expansion will come from digital goods and services, many of which will no longer be taxed as we enter the digital age.

In a recent press conference, Landry stressed that the government wants to prioritize taxing people’s choices over taxing their labor.

According to the analysis, households earning between $30,000 and $40,000 would face a 29% increase in annual sales tax payments, an average of about $96.

In contrast, those earning between $600,000 and $700,000 would see a 36% increase, or about $826 more per year.

This structure slightly reduces the regressive nature of the state’s current sales tax system, which tends to place a greater burden on low-income earners. Higher-income households, which tend to spend more, will bear a larger share of the tax increase — about 37% of the total increase, the report said.

Another important aspect of the plan is that Louisiana residents will not have to bear the full burden of sales tax increases. The report estimates that less than half of the additional revenue from the sales tax changes will come from Louisiana households. The rest will likely be paid by non-residents, tourists and businesses, reducing the burden on local taxpayers.

COMBINED EFFECT

The proposed changes to state income and sales taxes are expected to result in a net tax reduction for most households.

According to the report, the income tax cuts included in the governor’s broader tax reform plan will generally outweigh the increases in sales tax payments. The combined income and sales tax liability of approximately 1.08 million households is expected to decrease by 20% or more, with most of those households earning between $15,000 and $80,000.

There would be 151,000 low-income households making up to $10,000 whose taxes would be increased slightly, even though they generally pay little to no income tax under the current system.

For this group, the sales tax increase outweighs the benefit of the income tax cuts, with the total increase averaging between $9 and $29 per year.

“Both the percentage of liability and the absolute dollar amount of the tax increase increase as income increases,” PAR said in the report. “Therefore, the proposed sales tax changes appear to slightly reduce the overall regressivity of the state sales tax compared to the current system.”

According to the analysis, households earning between $30,000 and $40,000 would face a 29% increase in annual sales tax payments, an average of about $96.

In contrast, those earning between $600,000 and $700,000 would see a 36% increase, or about $826 more per year.

Another important aspect of the plan is that Louisiana residents will not have to bear the full burden of sales tax increases. PAR estimates that less than half of the additional revenue from the sales tax changes will come from Louisiana households. The rest will likely be paid by non-residents, tourists and businesses, reducing the burden on local taxpayers.

A big challenge

Landry is expected to call a special session to pass the 10 bills. These ten bills are over 500 pages long and contain a constitutional amendment.

In a special session, the Legislature has just ten days to consider, debate and vote on the reforms. Some questioned why the government wouldn’t wait until the fiscal session scheduled by lawmakers.

“The Legislature can solve the fiscal cliff, and the time to solve that fiscal cliff is during next year’s regular session when we have a fiscal session of the Legislature,” Jan Moller, executive director of Invest in Louisiana, recently told The Center Square. “There is no reason why this needs to be done in a special session in November, during the holiday season, when the people of Louisiana are used to focusing on anything and everything, except for the state legislature to get this done within two weeks. “