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Tax trade-off: Income tax cut would be offset by sales tax on pet grooming, car washes, other services
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BATON ROUGE — Louisiana’s top revenue officer went before a Senate committee Thursday to lay out a proposal that would shift the state away from an income tax-driven budget to one that depends more on sales taxes for goods and services.
One of the biggest components is cutting the top personal income tax rate. It would be lowered from 4.25 percent to three percent.
"On the personal income tax side and the corporate tax side, we'd have the second lowest rate in the country. We'd make it super competitive. We would go from basically the bottom in tax competitiveness to the top. It's one of the best things we can do to grow the state, to bring jobs, and to bring people back home," State Secretary of Revenue Richard Nelson said.
Another key component of the package is a permanent pay raise for teachers.
"As part of the change in the Constitution, what'd we like to do is take about two billion dollars that's currently tied up in the Constitution and use it to pay off this teacher pension debt that's accumulated over time. So that two billion dollar payment would free up about three hundred million dollars a year," Nelson said.
They'd use that money to give teachers a permanent pay raise of around five percent.
Sales taxes would be added to several services, including but not limited to car washes, delivery and freight services, information systems, parking garages, laundry service, boat storage, automobile associations, taxis and pet grooming. Prescription drugs and some other items would be exempt.
"In Louisiana, the local governments usually assess a tax on prescription drugs, which can be about five or six percent. We're one of the only states that allow that to happen and so part of this package is to basically allow or prohibit local governments from taxing prescriptions," Nelson said.
At the Senate Revenue and Fiscal Affairs Committee, one lawmaker questioned whether the new tax structure would be regressive, as low-income residents pay a larger share of their earnings on sales taxes.
“To what extent does this impact the regressiveness of our income tax cut – where the Louisianians who makes the least amount pays the greatest percentage in taxes, versus the Louisianan that makes a huge amount and pays a lesser percentage?” asked Sen. Joseph Bouie, D-New Orleans.
Louisiana Revenue Secretary Richard Nelson said an increased income tax exemption would offset the impact.
“The increase in (the income tax’s) standard deduction from $4,500 to $12,500 – it wipes out the liability for the bottom 20 percent,” Nelson said. “They have a 100 percent income tax reduction."
Nelson also said those in the top 10 percent of income earned would also pay a higher percentage of income tax than what they pay now. According to third-party analysts, he said, “It actually makes the system slightly more progressive than the system is now.”
Gov. Jeff Landry has said he intends to call a special legislative session to take up changes in how the state raises money.
The way Nelson sees it, Louisiana should shift its tax structure to one more like those in Florida, North Carolina, and Texas. Florida and Texas do not have an income tax at all. North Carolina 11 years ago lowered its income tax and began charging sales taxes on more services.
Mississippi is looking into whether it should eliminate its income tax, and Georgia recently cut its taxes on wage earners.
Under questioning by Sen. Glen Womack, R-Harrisonburg, Nelson said that in many areas switching companies from income taxes to taxes on goods and services could happen virtually immediately.
“Our feeling is that some of it will happen immediately,” Nelson said. Larger companies are already remitting sales tax money to the state for some items, and adding others could happen quickly, Nelson said.
A preliminary analysis shows that in the current fiscal year, the state’s general fund would be down by $124 million, but by 2025-26 tax revenue would increase $194 million, according to the administration.
At a hearing before a House panel earlier in the month, Nelson said taxpayers would see income tax relief quickly, with adjustments to taxes withheld on their paychecks, should the changes be approved.
In addition to legislative approval, some provisions would likely need a vote of the people.
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