Facing big deficits, Louisiana considers tax changes

Facing budget deficits of $587 million to more than $800 million starting next fiscal year, Louisiana lawmakers are convening an extraordinary legislative session to consider changes to taxes and the state’s constitution.

Without changes, the deficits of $587 million or more per year are projected to commence in fiscal 2026, which starts July 1, 2025. In December the state projected there would be $11.99 billion in general fund revenues in fiscal year 2024.

Gov. Jeff Landry in late October ordered the special session to start Wednesday and to run no later than Nov. 25.

“Louisiana has been facing a structural budget challenge for several years that Fitch has previously noted as a credit vulnerability and one factor limiting the rating,” said Eric Kim, Fitch Ratings senior director and head of U.S. state government ratings.

Fitch rates Louisiana AA-minus with a stable outlook.

“The governor is proposing changes in the tax structure for the state that have the potential to balance the budget,” said Evercore Wealth Management Director of Municipal Bond Research Howard Cure. “However, there are questions if the changes in taxes will generate sufficient revenues to offset the expiration or lowering of other tax revenues.”

The governor’s special session proposals would raise some taxes and lower others, shifting the burden towards people who work for a living while lowering taxes paid by richer people and corporations.

The governor and outside analysts say the projected deficit stems from ongoing income tax rate cuts combined with a scheduled cut in the state sales tax rate to 4.00% from 4.45%, which would cost the state hundreds of millions of dollars in fiscal 2026 and similar amounts in following years.

House Bill 514, enacted in 2021, shifts 60% of vehicle sales tax collections to the transportation trust fund from the general fund, which is projected to cost the general fund $296 million in fiscal 2026.

In 2021 the government passed a bill that set revenue growth and reserve level triggers that would lower the state’s individual income tax level. These also may lower the fiscal 2026 haul.

Fitch Ratings considers the law’s “lowering of the constitutional cap on the income tax rate and the statutory tax cut triggers as moderately limiting the state’s fiscal tools” to manage future challenges.

“The combination of the expiration of a temporary 0.45% additional sales tax, planned transition of general fund sources towards the state’s transportation trust fund and implementation of potential tax cuts as part of a complex 2021 tax plan create the potential for a significant revenue cliff, particularly at the end of fiscal 2025,” Kim said Tuesday.

If all of Landry’s special session proposals are enacted, there could be a net positive effect on the general fund in the next five years.

“But it’s critical to note that the estimates from the Louisiana Department of Revenue and Legislative Fiscal Office are preliminary and based only on the governor’s proposal and that no legislation has been enacted yet,” Kim said.

Landry is a Republican and the GOP has supermajorities in both houses of the legislature.

Among Landry’s proposals for the legislature in the upcoming session will be more income tax cuts, through a simplification of the current three-tier income tax to a single tier income tax and, for the elderly, an increase in the standard deduction amount. The current maximum income tax rate of 4.25% would be reduced to 3%.

The corporate income tax rate would also shift from a graduated tax with a maximum rate of 7.5% to a flat tax of 3.5%, leaving the state the second lowest corporate rate of any state, according to the state’s revenue secretary.

Landry says losses from these proposals would be outweighed by canceling the planned 0.45% cut in the sales tax rate and expanding the sales tax to cover a wide range of services.

The proposed tax changes would shift the tax burden from high income residents to low-income residents, said Muni Credit Today Publisher Joseph Krist.

“Income can be sheltered while there is no shelter from the sales tax for the lower income individual,” he said.

The special session will also consider paying off the Teachers Retirement System’s unfunded accrued liability and changing the corporate franchise tax, estate tax, ad valorem tax and severance tax on extraction of natural resources. It will consider extending taxation to digital products and consider calling a statewide election on proposed constitutional changes.

“This special session fulfills the promise we made to the people of Louisiana to rebuild our economy and make Louisiana a place where people want to raise a family and create jobs,” Landry said. “Throughout this special session, we have the opportunity to give teachers a permanent pay raise, put more money in every worker’s pocket, eliminate the tax on prescription drugs, and provide much needed tax relief for seniors.

“I am eager to enact this new playbook and finally make Louisiana a beacon of hope — inviting families and business back home,” Landry said.

Kroll Bond Rating Agency assigns Louisiana its AA rating with a stable outlook.

The projected deficit should be viewed in the context of the unaudited $595.1 million surplus in fiscal 2024 and the statutory mandate that triggers a special legislative session if a budget isn’t resolved within 30 days, said KBRA senior director Michael Taylor.
“Ultimately, given the balanced budget requirement and the mechanics behind the state’s expenditure growth limitations, we believe that management will likely address the projected shortfall without the material usage of the state’s ample reserve balances,” he said.

In Louisiana surplus general funds cannot be used for recurring operating expenses. Instead, they must be split between augmenting budget reserves, paying down retirement debt, and covering capital costs.

Landry has “made clear his interest in eventually eliminating the state’s income tax,” Kim said. “Fitch would closely assess any long-term plans to eliminate this key revenue sources in the context of how the state would be able to maintain structural balance.”

The Fitch rating anticipates Louisiana will take timely action to manage its revenue challenges, Kim said.

Cure said the proposed tax changes will be presented as a set of revisions to the state constitution that require 2/3 of each legislative chamber to vote in favor, followed by voter approval. The 2021 law combined with meeting certain revenue thresholds may trigger across-the-board personal income tax cuts in January 2026, he said.

“KBRA believes that Louisiana’s projected budgetary shortfall, primarily attributable to the sunsetting of non-recurring federal COVID funding and the aforementioned structural tax changes by fiscal year end 2025, may necessitate reductions in capital spending on infrastructure and/or cabinet-level reductions in appropriations,” Taylor said.

Louisiana GOs are rated Aa2 by Moody’s Ratings.

S&P upgraded Louisiana to AA from AA-minus in March.

“To date the state has been able to adjust spending to help offset the lessening revenue but should greater budget gaps arise and active steps not taken to maintain structural balance, we could see downside rating pressures emerge,” S&P Associate Director Rob Marker said this week.

S&P also noted Louisiana’s economic fundamentals generally trail the U.S., including population declines, comparatively low income levels, and gross state product growth that usually lags the U.S.

In a March report KBRA noted the state had modest exposure to commodity pricing volatility given economic concentration in chemical and petroleum production and the state had “increasing economic vulnerability to climatic events, including hurricanes and coastal erosion.”