Louisiana Franchise Tax Repeal: Louisiana Tax Reform of 2023

Legislation in Louisiana related to the franchise tax, inventory tax, and corporate rebate and exemption programs will make the state’s tax code simpler and more competitive. These measures will be a significant step forward and will build on the good work of previous reforms.

Corporate Franchise Tax Phaseout (SB 1) and Quality Work Program Rebate Reduction (SB 6)

The term “franchise tax” has different meanings from state to state, but generally refers to a tax for the privilege of doing business in a given jurisdiction. However, the Louisiana franchise tax is a capital stock tax and, unlike the corporate income tax, is imposed on the net value of the business, not net profits. Functionally, it discourages capital investment in the state and obligates businesses to pay taxes regardless of profitability. The result is that Louisiana’s franchise tax hampers the state’s overall competitiveness, especially since it has the second highest rate in the nation. (It was the highest rate in the country until this year, when the rate decreased slightly). Tax categories.

If the franchise tax were repealed, then Louisiana would improve from 39the to 37e Overall about us State Business Tax Climate Index, which evaluates state tax structures. Moreover, its elimination would result in a sharp improvement in the state’s property tax ranking (which includes all taxes levied on net worth), moving from 23rd.rd until 8e.

Eliminating Louisiana’s troubled franchise tax puts the state in line with other states that have either repealed, are planning to repeal, or have made significant changes to their capital stock tax. Kansas phased out the tax through the 2011 tax year. Virginia and Rhode Island did so in 2015, and Pennsylvania joined in 2016. Mississippi is in the process of phasing out the capital stock tax. Connecticut is also phasing out its version, and New York and Illinois have made significant progress in this area of ​​tax law and policy.

For tax years beginning January 1, 2025, SB 1 proposes to reduce the franchise tax by 25 percent each year to meet certain revenue goals, consistent with the Louisiana Constitution and state statute. Tied to SB 1, SB 6 lowers the discount rate under the Quality Jobs Program for each year the franchise tax is cut, alleviating concerns about lost revenue from ending the franchise tax.

In particular, the Quality Jobs Program offers businesses cash rebates for creating “good-paying” jobs and economic development in the state. Although well-intentioned, programs like these seek to provide a solution to an otherwise unscrupulous tax policy. Reducing this rebate program along with the gradual reduction of the franchise tax is not only responsible from a revenue standpoint, but also enhances the state’s competitiveness as a whole. In general, changing business incentives to eliminating taxes that discourage capital investment is a positive change. Although not scored separately, the rebate reduction is a structural improvement to the tax code and, by offsetting capital stock taxation, represents a pro-growth change.

Inventory Tax and Industrial Property Tax Exemption Program (SB 2)

Generally, under the state constitution, business inventory in Louisiana is subject to property taxes unless specifically exempted. In addition, through the Industrial Property Tax Exemption Program (ITEP), the State Board of Commerce and Industry, with the approval of the Governor, may enter into contracts to exempt new and expanded manufacturing facilities. ad valorem tax. SB 2 would cap the exemption and begin a five-year phase-out of the inventory tax beginning in 2024.

As we have written in the past, these taxes are highly distortive and force companies to make production decisions that are not necessarily based on economic principles. They further incentivize companies to seek jurisdictions where they can avoid these harmful taxes. Like all taxes on tangible personal property (TPP), moreover, inventory taxes are active within the taxpayer, meaning that taxpayers must assess the value of their inventory for tax purposes, in addition to tax compliance costs.

Although eliminating the inventory tax results in a modest improvement in the state’s overall ranking, from 39.e to 38eA much more significant gain is possible on the state’s property tax score, moving it from 23rd until 12e. Here again, a tax waiver is much better than relying on compensation like ITEP.

Louisiana index The rating will improve according to the proposed reforms
reformtotal scoreProperty tax score
Current rating3923
Franchise tax phase-out378
Inventory tax phase-out3812
Phase-out of franchise tax and inventory tax364

Source: 2023 State Business Tax Climate Index; Tax fund calculations.

Phasing out the franchise tax or inventory tax (and related incentives) would improve Louisiana’s ranking, but phasing out both would provide the most overall and property ranking improvements. Of course, there are currently other tax reform measures that the state should implement, but the elimination of franchise and inventory taxes will be a very positive development that can build on the recent reforms.

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