The Louisiana Legislature’s 2021 Regular Session has now concluded and after a long and particularly contentious session, the Legislature was able to get substantial portions of its tax reform package across the finish line.
Prior to the start of the 2021 Regular session, Louisiana’s legislative leadership identified four main tax reform measures to be addressed, including:
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Centralizing state and local sales/use tax collection/administration;
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Eliminating the current federal income tax deduction for individual and corporate income tax purposes, and modifying individual income and corporate tax rates;
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Reducing/repealing (and/or simplifying) the Louisiana corporate franchise tax; and
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Phasing out local property tax on inventory.
In the deliberation of these measures, the Legislature was faced with the additional challenge of balancing net tax revenue decreases to the state given the anticipated federal aid the state would receive through the American Rescue Plan Act of 2021 (ARPA). ARPA prohibits states from using funds disbursed under the act to directly or indirectly offset a reduction in the net tax revenue of a state through legislative or regulatory changes, or by administrative interpretation. Therefore, any tax-related action by the Louisiana Legislature that reduces revenue could be deemed by the Federal Treasury to have contravened the act, thus exposing the state to ARPA’s statutory consequences.
Ultimately, and as predicted by Senator R.L. “Bret” Allain, II, Chairperson of the Senate Revenue and Fiscal Affairs Committee during Jones Walker’s Louisiana Legislative Update 2021 Webinar, the Louisiana Legislature was unable to pass legislation related to phasing out local property tax on inventory and a complete repeal of the corporate franchise tax. However, the Legislature was able to make substantial progress towards a more simplified and economically competitive state tax regime.
What Tax Reform Measures Ultimately Passed?
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Centralization of state and local sales/use tax collection/administration – HB 199 provides for the State and Local Streamlined Sales and Use Tax Commission (the Commission). The Commission, which is to be comprised of eight Senate confirmed members, will provide for the streamlined electronic filing, electronic remittance, and the collection of all sales and use taxes levied against sales made in/into the state of Louisiana. As HB 199 impacts the autonomy of local tax collectors, HB 199 requires the amendment of the Louisiana Constitution. A statewide election where the all bills that would amend the Constitution if passed is scheduled for October 9, 2021.
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Continued the suspension of the franchise tax for small businesses and reduced the franchise tax rate – SB 161 makes several changes to the Louisiana corporation franchise tax, including: (1) continuation of the suspension of the tax on the first $300,000 for small business corporations to July 1, 2023, (2) reduction of the rate of the tax from $3.00 to $2.75 per $1000 of taxable capital above $300,000 and (3) further rate reductions based on future corporation income and franchise tax collections. The rate reduction provisions must be adopted in the state wide election occurring on October 9, 2021 in order to be enacted, and the bill is also contingent on the enactment of HB 278 and HB 292, which are discussed below.
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Simplified corporate tax rates and elimination of the federal income tax deduction – HB 292 repeals the federal income tax deduction (FIT Deduction) pursuant to La. R.S. 47:287.85 and related statutes, and reduces the Louisiana corporation income tax brackets from 5 to 3 with rates of 3.5%, 5.5% and 7.5%. However, the ultimate effectiveness of HB 292 is contingent on several other enactments from the 2021 Regular Session.
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First, either HB 275 or SB 159 must be adopted in a statewide election to be held on November 8, 2022, to amend Art. VII, Section 4 of the Louisiana Constitution. While both HB 275 and SB 159 proposed to essentially eliminate the FIT Deduction for Louisiana corporate income tax purposes, SB 159 passed while HB 275 did not. SB 159 was approved by a 2/3rds vote by both the Senate and the House of Representatives and now must be adopted in the statewide election occurring on October 9, 2021. The bill eliminates the constitutional mandate for the FIT deduction, essentially eliminating it in conjunction with the related legislation.
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Second, HB 278 and SB 161 (see above) must also be enacted for HB 292 to become law. HB 278 was passed by the Legislature and is currently awaiting approval by the Governor. HB 278 reduces the rates for calculating individual income tax from 2% to 1.85%, 4% to 3.5%, and 6% to 4.25%. As noted above, although SB 161 was passed, the franchise tax rate reduction provisions included in SB 161 must be adopted in the state wide election occurring on October 9, 2021.
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Because multiple pieces of this legislative package include constitutional amendments, Louisiana’s voting public will ultimately determine the success of the Legislature’s tax reform plan.
Other Notable Tax Legislation
In addition to the “big four” tax reform measures discussed above, the following notable tax bills were passed by the Legislature and sent to the desk of Governor John Bel Edwards (D) for review and signature (or veto):
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SB 157 exempts certain nonresident mobile workers from the individual income tax;
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SB 160 amends state partnership reporting system relative to federal audit adjustments;
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SB 31 provides an individual income tax exemption for digital nomads;
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SB 36 provides relative to net operation loss deduction on Louisiana corporation income;
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HB 50 provides a sales tax exclusion for certain leases and rentals for re-lease or re-rent; and
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HB 573 extends the jurisdiction of the Board of Tax Appeals to ad valorem property tax matters.
Although the 2021 Regular Session has now concluded, many expect that the Governor Edwards will call the Legislature into a special legislative session later this year in order to address numerous issues that were not covered during this session.
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