Laws at present advancing in Louisiana—associated to the franchise tax, stock tax, and company rebate and exemption applications—would make the state’s tax code less complicated and extra aggressive. These measures can be an essential step ahead and construct on the nice work of earlier reforms.
Company Franchise Tax Phaseout (SB 1) and High quality Job Program Rebate Discount (SB 6)
The time period “franchise tax” has completely different meanings from state to state however typically refers to a tax on the privilege of doing enterprise in a given jurisdiction. Nevertheless, Louisiana’s franchise tax is a capital stock tax and, not like a corporate income tax, is imposed on a enterprise’s web value slightly than web earnings. Functionally, this discourages capital funding within the state and requires companies to pay the tax no matter profitability. The result’s that Louisiana’s franchise tax is a drag on the state’s total competitiveness, notably because it has the second highest fee within the nation. (It was tied for the very best fee within the nation till this 12 months when the speed was decreased barely.) Eliminating the tax additionally reduces enterprise compliance prices, that are exacerbated when states go for a number of separate taxes on enterprise slightly than relying solely on the foremost tax classes.
If the franchise tax was repealed, then Louisiana would enhance from 39th to 37th total on our State Business Tax Climate Index, which evaluates state tax constructions. Furthermore, its elimination would yield dramatic enchancment within the state’s property tax rating (which incorporates all taxes levied on a web value foundation), transferring from 23rd to eightth.
Eliminating Louisiana’s problematic franchise tax would put the state according to others which have both repealed, plan to repeal, or have made vital modifications to their capital inventory tax. Kansas phased out the tax previous to the 2011 tax 12 months. Virginia and Rhode Island did so in 2015 and Pennsylvania joined in 2016. Mississippi is within the technique of phasing out its capital inventory tax. Connecticut can also be phasing its model down, and New York and Illinois have made substantial progress on this space of tax legislation and coverage.
Relevant to tax years starting January 1, 2025, SB 1 proposes franchise tax reductions by 25 % annually that sure income targets are met, per the Louisiana Constitution and state statute. Tied to SB 1, SB 6 reduces the rebate fee below the High quality Jobs Program for annually that the franchise tax discount is triggered, assuaging considerations concerning misplaced income ensuing from the franchise tax phaseout.
Particularly, the Quality Jobs Program presents companies a money rebate for creating “well-paid” jobs and financial improvement within the state. Whereas well-intended, applications like this search to supply a treatment for in any other case unsound tax coverage. Decreasing this rebate program together with phasing down the franchise tax isn’t solely accountable from a income standpoint but in addition enhances the state’s competitiveness total. Typically, swapping a enterprise incentive for the elimination of a tax that daunts capital funding is a optimistic change. Whereas not scored individually, the rebate discount is a structural enchancment to the tax code and, by offsetting the taxation of capital inventory, constitutes a pro-growth change.
Stock Tax and the Industrial Property Tax Exemption Program (SB 2)
Typically, per the state structure, enterprise stock in Louisiana is topic to property tax except particularly exempted. As well as, by way of the Industrial Property Tax Exemption Program (ITEP), the state’s Board of Commerce and Business, with gubernatorial approval, might enter into contracts to exempt new and increasing manufacturing amenities from this advert valorem tax. SB 2 would restrict the exemption and start a five-year phaseout of the stock tax starting in 2024.
As we have now written up to now, these taxes are extremely distortionary and power corporations to make manufacturing selections that aren’t essentially based mostly on financial rules. They additional incentivize corporations to hunt out jurisdictions the place they’ll keep away from these dangerous taxes. Like all taxes on tangible private property (TPP), furthermore, stock taxes are taxpayer lively, which means that taxpayers should assess the worth of their stock for tax functions, including to tax compliance prices.
Whereas eliminating the stock tax yields a modest enchancment to the state’s total rating, from 39th to 38th, way more vital good points are potential for the state’s property tax rating, transferring it from 23rd to 12th. Right here, too, repealing a tax is much better than counting on an offset just like the ITEP.
|Reform||Total Rating||Property Tax Rating|
|Phaseout of the Franchise Tax||37||8|
|Phaseout of the Stock Tax||38||12|
|Phaseout of Each Franchise Tax and Stock Tax||36||4|
Supply: 2023 State Enterprise Tax Local weather Index; Tax Basis calculations.
Phasing out both the franchise tax or the stock tax (and associated incentives) would enhance Louisiana’s rankings, however phasing out each would supply essentially the most total and property rank enchancment. In fact, there are different tax reform measures at present into consideration that the state ought to pursue, however eliminating the franchise and stock taxes can be a really optimistic improvement that might construct on latest reforms.