Louisiana tax swap plans win final passage to reach ballot

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FILE – This Wednesday, Feb. 13, 2019 file photo shows part of a 1040 federal tax form printed from the Internal Revenue Service website. On Friday, Aug. 21, 2020, The Associated Press reported on stories circulating online incorrectly asserting that Democratic presidential candidate Joe Biden’s tax rate on a family making $75,000 dollars a year would go from 12% to 25%. A current federal tax rate of 12% applies to families making up to $80,000, or individuals making up to $40,000. That would still apply under Biden, who has vowed publicly not to raise taxes on anyone making less than $400,000. (Associated Press)

BATON ROUGE, La. (AP) — A long-recommended proposal to untie Louisiana’s income tax collections from federal tax payments won passage Thursday from lawmakers on the legislative session’s last day, sending the concept to voters for a decision on the October ballot.

The proposal would get rid of personal income tax and corporate tax deductions for federal income taxes paid in exchange for lowering the state’s income tax rates. Louisiana also would permanently eliminate the corporate franchise tax for small businesses and lower the tax rate for others.

Franklin Republican Sen. Bret Allain, who led the Senate tax debate, hailed passage as a critical “tax reform.”

Gov. John Bel Edwards could scuttle the overhaul if he vetoes individual pieces of a package that requires all measures to pass before it can take effect. Republican legislative leaders said they’ve been working with the Democratic governor on the bills, and Edwards has broadly supported the tax swap concept for years. But he hasn’t announced a public position on the specific package of bills that passed.

Louisiana allows taxpayers to deduct the federal income taxes they pay from the computation of their state income taxes. When federal income taxes go up, Louisiana collects less in state taxes. When federal income taxes go down, state tax collections rise.

That leaves Louisiana’s treasury harmed or helped by decisions out of state control — a situation that tax experts, economists and government watchdog groups have lamented for years.

The conservative Pelican Institute for Public Policy praised the tax package as starting “the process of simplifying our overly complex and burdensome tax code that has sent jobs and opportunity to other states and hurt Louisiana’s families for far too long.”

In exchange for losing the tax break for federal taxes paid, taxpayers would receive a 1.85% personal income tax rate on the first $12,500 of net income, down from 2%. The tax rate for the next $37,500 of income would fall from 4% to 3.5%, and the rate for income above $50,000 would drop from 6% to 4.25%.

The constitutional change also would cap the maximum allowable rate of personal income tax in Louisiana at 4.75%, so lawmakers could never increase the rate above that percentage unless returning to voters for another decision.

On the corporate side, the proposal would scrap current rates that range from 4% to 8% and companies would lose the ability to deduct federal taxes paid from their state taxes. In exchange, the state would charge companies a 3.5% tax rate on the first $50,000 of earnings; 5.5% on earnings above $50,000 and up to $150,000; and 7.5% on earnings above $150,000.

Corporate franchise and personal income tax rates could fall lower if Louisiana sees certain revenue growth in later years.

The tax changes are more generous to corporations than individual taxpayers. Also, lawmakers didn’t address the myriad of tax breaks on the books, which tax experts have criticized as unnecessarily complicated and unfair. Efforts to chip away at the exemptions and credits failed to gain traction amid intense resistance from industries that benefit from the tax breaks.

With the tax swap proposals, Republican legislative leaders said they expect to largely raise the same amount of revenue for the state treasury, to meet a provision in federal coronavirus aid legislation that won’t allow assistance to flow to states that cut taxes. But a nonpartisan financial analysis of the bills suggests the state could lose some money in the early years of the changes.

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Follow Melinda Deslatte on Twitter at http://twitter.com/melindadeslatte.

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