By Jason DeCuir, Partner and Co-Owner
Prepared by Advantous Consulting June 29, 2021
While tax reform is certainly not a new topic in Louisiana, a state with one of the most complex tax structures in the country, the 2021 legislative fiscal session proved to be one of the most unique and important sessions in a very long time. The state constitution allows for a fiscal session every odd year; however, tax reform is unlikely to occur during an election year. This made 2021 a “make it or break it” year in which to make substantive changes to the tax code.
This year, instead of having tax reform as part of the Governor’s agenda, legislative leadership from both chambers came together and worked tirelessly towards creating a tax reform package to overhaul Louisiana’s complicated structure. These efforts were successful due to the leadership of Senate President Page Cortez, House Speaker Clay Schexnayder, Senate Revenue and Fiscal Affairs Chairman Bret Allain and House Ways and Means Chairman Stuart Bishop.
Louisiana currently ranks 42nd on Tax Foundation’s State Business Tax Climate Index and the Council on State Taxation gave Louisiana a score of “F” in sales tax administration. These poor rankings and perceptions sparked legislative efforts to improve Louisiana’s tax structure to increase the state’s economic competitiveness. To accomplish this objective, leadership introduced the following initiatives into their tax reform package:
- Streamlining sales and use tax collection and administration
- Eliminating the federal income tax deduction for both personal and corporate income taxes
- Lowering both personal and corporate income tax rates
- Continuing the phase-out of the franchise tax
- Reducing severance tax rates
- Simplifying the ITEP approval process
- Eliminating inventory from the property tax base
Although the Governor did not have a direct role in these efforts, he indicated support for any tax reform package accomplished in a revenue neutral manner. This “revenue neutral” stipulation created an additional challenge for legislators to improve the tax code by lowering rates and reducing the number of brackets.
The centerpiece of tax reform was HB 199 (Act 131), a constitutional amendment proposed by Speaker Schexnayder to streamline Louisiana sales and use tax collection. Louisiana has the most complex system of sales tax administration, which has long been a burden to Louisiana businesses. This effort began last session with the adoption of the Speaker’s HR 31, which created a study group to research and develop the best solution to centralize sales tax collections. The majority of the study group’s final proposals were included in Act 131.
Act 131 creates a commission, “The State and Local Streamlined Sales and Use Tax Commission,” which will be composed of eight commissioners—four from the state and four from local government. This entity will be tasked with streamlining sales and use tax collections, simplifying the audit process, as well as providing policy advice and promulgating rules.
After adjournment of the session, Speaker Schexnayder called the passage of Act 131 “the most successful effort towards centralization the state has seen in 40 years.” However, the constitutional amendment will need to be approved by the people of Louisiana in a special election held on October 9, 2021 before it can take effect.
As part of the revenue neutral tax reform package, the legislature passed HB 278, HB 292, SB 159 and SB 161 to reform individual income, corporate income, and franchise taxes.
The individual income tax package includes HB 278 by Senator Allain and Representative Bishop which reduces the rates from 2% to 1.85%, 4% to 3.5%, and 6% to 4.25%. The bill includes a “trigger” that would further reduce rates based on state revenue growth. SB 159, also authored by Senator Allain, is a constitutional amendment that removes the FIT deduction and reduces the top marginal income tax rate to 4.75%. This constitutional removal of the FIT deduction provides that unless the legislature enacts the deduction by statute, it will no longer be available to taxpayers in exchange for lowering the rates.
The State of Louisiana also has one of the highest rates of corporate income tax in the country and operates with five distinct brackets.
Representative Riser and Senator Allain teamed up to reform corporate income taxes by lowering rates, reducing the brackets, and phasing out the harmful franchise tax. HB 292 by Representative Riser takes corporate income tax from five distinct rates to just three: 3.5%, 5.5% and 7.5%. While Representative Riser originally proposed a separate bill to set a flat corporate income tax rate of 6.5%, the legislature ultimately landed on this compromise to simplify the structure and reduce the top rate. SB 161 by Senator Allain reduces the franchise tax rate from $3 per $1,000 to $2.75 per $1,000 of taxable capital and eliminates the franchise for all taxpayers on the first $300K of capital.
All of the income and franchise tax reform bills are tied together in statute. Therefore, if the Governor vetoes any of the bills, or if SB 159 is not approved by the people of Louisiana in October, the entire income tax reform package will fail to be enacted.
Two other bills that completed the tax reform package are SB 157 and SB 160 by Senator Allain. SB 157 allows nonresidents to work in Louisiana for up to 25 days of the calendar year without being subject to individual income tax. SB 160 provides an elective, simple, and uniform process to report federal adjustments to the Louisiana Department of Revenue at the partnership level.
In addition to income tax reform, the oil and gas industry was hoping for much needed reform to severance tax. Louisiana’s severance tax structure is very complex and taxes oil and gas by two separate methodologies. Louisiana’s severance tax rates, particularly for oil, are among the highest in the country and makes Louisiana less attractive for investment in this industry. However, a few severance tax bills were passed this session.
To help provide relief from high severance tax rates, HB 26 by Representative McCormick increases the “per barrel” value of crude oil exempted from severance tax from $25 to $35 and applies only to stripper wells. In addition, Representative Coussan and Senator Allain teamed up to reform severance taxes related to orphan wells. SB 171 bill states that “in the event of new production from an orphaned well, a site-specific trust account will be established to provide a source of funds for future site restoration of that oilfield site. The site-specific trust fund will remain in effect until completion of site restoration of the associated oilfield site.” The bill also exempts oil produced from an orphaned well that is undergoing or has undergone well enhancements requiring a DNR from severance tax when production commences on or after October 1, 2021, and before June 30, 2031. The operator shall retain the severance tax due for the first three months and then in the fourth month, this money shall be paid to the site-specific trust account.
Another significant piece of legislation was HCR 98 by Representative Beau Beaullieu that highlights some of the problematic policies facing the oil and gas industry nationally. This was a resolution to express the legislature’s opposition to a disproportionate increase in the taxation of oil and gas industries.
While infrastructure was not part of the tax reform package, infrastructure funding was one of the main initiatives of the 2021 legislative session.
Several different efforts were attempted to shrink the state’s $14 billion infrastructure backlog by steering funds to the Construction Subfund of the Transportation Trust Fund. Although many ideas were discussed, the legislature ultimately landed on the concepts included in HB 514. HB 514 directs a portion of the 4.45% state sales tax on motor vehicles to the Construction Subfund. This dedication begins July 1, 2023 and will ultimately phase in about $300 million a year to infrastructure projects. The bill does have a trigger such that if the state encounters a deficit, a portion of the dedication could revert back to the general fund.
Although the legislature was able to pass a very impressive tax reform package that has been long overdue for the state, these instruments will still need to be signed by the Governor or voted in by the people of Louisiana to keep the state moving forward.