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Louisiana did something difficult this year, defying the expectations of many: through the work of Gov. Jeff Landry (R) and legislative leaders, it adopted a significant pro-growth 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.
reform package in special session.
Tax competitiveness is real and, in recent years, states around the country have adopted rate and structural reforms to attract and retain residents and businesses alike. At the same time, tax reform is difficult, and entrenched interests often push back against sweeping changes that could alter existing provisions or preferences that work in their favor.
Nevertheless, making the tax code more competitive has long been on the minds of Louisiana lawmakers and policy advisors. Past efforts have yielded important progress, but some proposed reforms, like repealing the franchise tax and ending certain incentives, passed both legislative chambers only to end in a veto under the previous administration. The state’s tax code has long been an outlier, and while prior reforms were important steps in the right direction, the state still trailed its peers, both regionally and nationally.
Louisiana has consistently ranked among the least competitive states in our annual State Tax Competitiveness Index. The state is plagued with net out-migration while its neighbor to the west, Texas, is a top 10 net in-migration state. This reality could, in part, be a symptom of Louisiana’s uncompetitive tax landscape. As we have noted, in recent years, states with more competitive tax codes have experienced positive net migration. Correlation does not equal causation, and taxes are not the only reason for migration decisions, but they remain a relevant factor—especially as individuals and businesses enjoy ever-greater mobility—and a competitive tax code can help.
Against this backdrop, Governor Landry’s administration and lawmakers set out to right the ship, and 2025 marks a potential course correction for the Pelican State, an endeavor the Tax Foundation has been engaged in for many years.
The November 2024 special legislative session yielded rigorous debate and several pro-growth and competitive tax reforms that will significantly improve the state’s Index rankings and, more importantly, begin to shift the tide toward economic growth.
Flat Rate Income Tax Structure for Individuals and Businesses
Beginning on January 1, 2025, Louisiana taxpayers will see a single-rate income tax structure, making it the latest state to join the flat tax revolution. Individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.
filers will pay a flat 3 percent rate and corporate taxpayers will be subject to a 5.5 percent rate. Additionally, the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes.
has been increased and indexed for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.
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Because Louisiana’s existing tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat.
are not indexed for inflation, taxpayers are currently subject to “bracket creepBracket creep occurs when inflation pushes taxpayers into higher income tax brackets or reduces the value of credits, deductions, and exemptions. Bracket creep results in an increase in income taxes without an increase in real income. Many tax provisions—both at the federal and state level—are adjusted for inflation.
” (i.e., when inflation pushes more of a taxpayer’s income into higher tax brackets even though that income is not higher in real terms). Adopting a single rate for both individuals and corporate taxpayers effectively resolves this problem, eliminating unlegislated, inflation-linked tax increases.
Adoption of Full ExpensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.
Due to the adoption of full expensing, businesses will be permitted to immediately deduct the full cost of their investments in machinery and equipment. The corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.
is intended to fall on profits, so it includes deductions for costs of doing business (compensation, cost of goods, etc.). But whereas most business costs are deductible when they are incurred, historically, capital investment has only been deductible over time, as the purchased property depreciates. While depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment.
makes sense from an accounting standpoint, it makes far less sense for tax purposes, increasing the cost of new capital investment. Due to inflation and the time value of money, businesses subject to this system never receive the full deduction.
The federal government adopted full expensing in 2017, but the policy is currently phasing out. Louisiana and other states that conformed to the federal provision have had this policy in place, but are now seeing it begin to phase down in accordance with the federal provision. Oklahoma and Mississippi were the first states to make full expensing permanent, regardless of what Congress does. By making full expensing permanent for state corporate income tax purposes, Louisiana policymakers have made the state more attractive to in-state investment.
Repealing the Franchise Tax
Businesses in Louisiana have been subject to a franchise tax on their net worth (or accumulated wealth), which penalizes investment and is imposed regardless of profitability. Additionally, there is no cap on maximum payments for these taxes, as is common in other states with such taxes, making an already uncompetitive tax even more detrimental. The special session repealed the franchise tax effective in 2026, eliminating an antiquated tax that discouraged in-state investment.
Potential Local Option on the Inventory Tax
Louisiana is one of a small number of states that taxes business inventory, which, like the state’s franchise tax, is imposed regardless of profitability. These taxes are non-neutral, disproportionately affecting those businesses with larger inventories and causing taxpayers to make inefficient timing and location decisions with their inventory.
The special session approved House Bill 7, which asks the voters to give parishes the authority to eliminate their own inventory taxes. If approved by voters, parishes will be able to opt out of levying the inventory tax, with proposals for the state to backfill the lost revenue in the near term.
Competitive Gains and Building on the Success of the 2024 Special Session
Had all the reforms enacted during the special session been in place at the time of our last State Tax Competitiveness Index, the state’s overall rank would have improved to 26th, a significant improvement compared to the current rank of 40th. Moreover, the state would have ranked among the top 15 in four of the five major categories of taxation (individual income taxes, corporate income taxes, property taxes, and unemployment insurance taxes).
The work of the special session propels Louisiana forward in important ways, but the work must not end there. Without future reforms, the state’s tax code will not be able to achieve its full potential in delivering a pro-growth and competitive economy.
Tax Incentive Reform
The special legislative session resulted in some limits on corporate tax incentives, but insufficient gains were made in this regard. Future efforts should include a critical evaluation of incentives in the tax code, prioritizing the reform or elimination of those that substantially distort economic decision-making. Incentives introduce non-neutrality into the tax structure by preferencing some taxpayers and industries over others. Over time, the tax code ossifies around the economy as it existed at a moment in time, or the economy that policymakers at one point hoped they could create—often leaving states poorly positioned to attract new industries for which the existing incentives were not designed. Overreliance on incentives makes it harder for Louisiana to capitalize on the dynamism of private sector innovation. Reducing or removing incentives may allow for the flat corporate income tax rate to be reduced further, if the fiscal health of the state allows, making the code even more competitive.
Sales TaxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.
Reform
Louisiana has long been a national outlier in sales tax competitiveness. Like most states, Louisiana taxes a fair number of business inputs and features a range of exemptions that narrow the consumer goods and services base and keep rates higher than needed. Future sound tax reform should reduce personal consumption exemptions and extend sales tax to personal services. Moreover, the state should reduce its reliance on the taxation of business inputs, which increases business costs that are ultimately passed on to consumers and/or put Louisiana businesses at a competitive disadvantage against out-of-state rivals.
These, however, are issues that all states face. In other areas, Louisiana stands apart. The state has made important gains with respect to different remote seller regimes. However, parishes’ and other jurisdictions’ ability to define their own tax bases and administer the taxes separately from the state imposes high compliance costs. While constitutional reforms are never easy, full centralization and unified state and local sales tax bases should remain a top priority. If this is not achieved, Louisiana will remain an example of unsound sales tax policy.
The Path Forward
Lawmakers will enter the 2025 fiscal legislative session with an opportunity to build on the successes of the November special session. Efforts should include addressing the outstanding issues within the corporate and sales tax codes that currently hold the state back. There is positive momentum in Baton Rouge, and a real recognition that sound tax policy can be part of building a competitive future for Louisiana.
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