Economist provides information on impacts of enacted income and sales tax changes
on Louisiana households
RESET Louisiana hired noted economist Greg Albrecht in fall 2024 to estimate the impacts
of proposed changes to state income and sales taxes from Gov. Jeff Landry’s
administration as part of its tax reform initiative. Lawmakers in a November special
session passed many administration proposals but with some significant adjustments
from the original proposals that Albrecht analyzed.
In response, RESET asked Albrecht to conduct a follow-up study looking at the same tax
types but based on the final version of tax changes enacted into law.
The updated study shows that, under the new Louisiana tax system, most Louisiana
households are likely to see a reduction in their overall tax liability. Further, while the new
tax structure is slightly less progressive than the prior tax system, it remains modestly
progressive overall.
As with the original study, Albrecht’s work uses income tax data from more than 1.7 million
Louisiana income tax returns along with sales tax collection modeling from the Louisiana
Department of Revenue. It estimates the impacts of the tax changes on taxpayers across
30 income brackets. This document includes highlights of the full study, which can be
found on the RESET Louisiana website.
Income Tax Changes in New Laws
The income tax changes from the November 2024 special session:
- Set a new 3% flat income tax rate for taxpayers at all income levels effective as of
Jan. 1, 2025. This replaced the tiered tax rate structure of 1.85%, 3.5% and 4.25%
based on taxable income levels that was previously in place. Overall, this results in
a lower marginal tax rate for the middle and top tiers of taxpayers. - More than doubled the standard deduction for all taxpayers, which effectively
eliminates the tax for the bottom tier of taxpayers who were previously taxed at a
rate of 1.85%. - Double the deduction for retirement income from $6,000 to $12,000 for those 65 or
older, reducing taxable income for these taxpayers. - Index both the increase in the standard deduction and the deduction for retirement
income to inflation, based on the Consumer Price Index. - Eliminate deductions of $1,000 for dependents, retirees over age 65 and the blind.
The loss of these deductions is more than offset by other changes to the income
tax. - Eliminate deductions for business capital gains and Internal Revenue Code 280C
expenses (dealing with certain business deductions and credits). These tend to
impact taxpayers at upper income levels, with only a minimal effect on their tax
liabilities.
These are the same income tax changes the administration originally proposed for the
special session, with one exception: The version that finally passed added an inflation
adjustment to the increases in the standard deduction and retirement income.
Impacts of Income Tax Changes:
While the dollar amount of income tax reductions gets larger as income rises, RESET’s
latest report shows that percentage of the reduction in tax liability tends to be larger at
lower incomes. In that sense, the new changes to the income tax appear to increase the
progressivity of the state income tax compared to the prior system.
In actual dollars, however, about 52% of the total income tax reduction will go to the top
10% of income filers – those with adjusted gross incomes of around $150,000 or more.
About 48% of the tax cuts will go to the remaining 90% of households reporting lower
incomes. This is largely a function of the fact that those at higher incomes generally pay a
larger dollar amount of income taxes.
In Louisiana, income for most businesses is taxed through the individual income tax not
the corporate income tax. Because of this, the income tax reductions are effectively
reducing income tax liability not only for individuals and households, but also for most
businesses in the state.
The report notes, however, that the inclusion of business taxes in the individual income tax
tends to distort the impacts seen in the tax tables for filers reporting very low levels of
adjusted gross income. This is because a significant number of those returns show a pass
through of business income losses.
Sales Tax Changes in New Law
The sales tax changes from the November 2024 special session:
- Increase the overall sales tax rate from 4.45% to 5% effective Jan. 1, 2025, until
2030. - Expand the general sales tax base to include digital products such as online
streaming services, prewritten computer software, cable television and satellite
entertainment services. - Levy an additional 5% tax on top of the general sales tax on telecommunications
services such as cable television and satellite entertainment services, effectively
bringing the rate on those services to 10%. - Differ significantly from the administration’s original sales tax proposal, which
would have retained the lower 4.45% general sales tax but expanded the tax base to
include a wider array of newly taxable services.
Impacts of Sales Tax Changes:
All Louisiana households are likely to see an increase in their state sales tax liability
because the changes increase the general sales tax and apply it to some additional
services.
The percentage increase for lower-income households is higher than for those at upperincome levels, largely because those with less income spend larger portions of it on goods
and services subject to sales taxes.
Conversely, the tax increase in actual dollars is greater for higher-income households
because their higher incomes allow them to spend more on goods and services that are
taxed.
According to RESET’s report, the changes in sales tax make the tax system slightly more
regressive than before the law was changed, as well as slightly more regressive than the
administration’s original proposal. This is because the original proposal extended the sales
tax base to services that are not necessarily used to the same degree by all households,
particularly at lower-income levels. The current increase, on the other hand, applies to
general sales taxes on all taxable items.
The study notes that the top 10% of taxpayers in the state will pay about 33% of the total
sales tax increase with 67% borne by the 90% of taxpayers with lower incomes. This is
because, in general, those with higher incomes spend higher amounts of money and thus
pay higher amounts of sales tax.
Impact of Combined Income and Sales Tax Changes
When looking at the combined impact of the changes to the individual income tax and the
state sales tax, RESET’s report shows most Louisiana households are likely to see a
reduction in their overall tax liability. That is because the reductions in income taxes are
generally larger than the increases in sales tax.
The study also shows that overall, the new changes to income and sales tax make only
slight changes to the way the liability of those taxes is distributed under the current
system.
Under the new plan, about 721,000 households (42%) will receive a reduction of 20% or
more in their combined sales and income tax liability. That is fewer than the 1,078,000 that
would have seen reductions under the original proposal. Of those taxpayers, 91% have
adjusted gross incomes below $50,000.
Those between $50,000 and $200,000 will still see a net reduction in income and sales
taxes, but in a range from about 13% to 19%. Those with incomes above $200,000 will also
see tax reductions of 20% or more, but they represent fewer than 100,000 taxpayers.
About 151,000 households with reported incomes between $0 and $10,000 will see a slight
increase in their taxes. This group includes taxpayers who were likely paying little to no
income taxes before the changes. Because of this, they were unable to realize any
meaningful benefit from the across-the-board reduction in personal income taxes, while
paying more because of increases in the sales tax. Nonetheless, the estimated tax
increase for these households is extremely small, averaging less than $50 per year.
Conclusion
The RESET study sought to provide information about the impacts of the newly enacted
changes to state income and sales taxes on taxpayers across a wide range of incomes. In
doing so, three major findings emerge:
- The vast majority of Louisiana citizens will see a tax cut, almost all in double-digit
percentages.
When considering the changes to both income and sales taxes, the state’s tax system
becomes slightly less progressive than it was but remains modestly progressive overall.
The overall reduction in taxes for most taxpayers, while significant, is slightly less than it
would have been under the administration’s original proposal.
RESET Louisiana is a nonpartisan collaboration between Leaders for A Better Louisiana and the
Public Affairs Research Council of Louisiana to pursue public policy initiatives that will improve the
state’s futurehttps://www.reset-louisiana.com/