Louisiana Franchise Tax Repeal: 2023 Louisiana Tax Reform
Legislation currently advancing in Louisiana—related to the franchise tax, inventory tax, and corporate rebate and exemption programs—would make the state’s tax code simpler and more competitive. These measures would be an important step forward and build on the good work of previous reforms.
Corporate Franchise Tax Phaseout (SB 1) and Quality Job Program Rebate Reduction (SB 6)
The term “franchise tax” has different meanings from state to state but generally refers to a tax on the privilege of doing business in a given jurisdiction. However, Louisiana’s franchise tax is a capital stock tax and, unlike a corporate income tax, is imposed on a business’s net worth rather than net profits. Functionally, this discourages capital investment in the state and requires businesses to pay the tax regardless of profitability. The result is that Louisiana’s franchise tax is a drag on the state’s overall competitiveness, particularly since it has the second highest rate in the country. (It was tied for the highest rate in the country until this year when the rate was reduced slightly.) Eliminating the tax also reduces business compliance costs, which are exacerbated when states opt for several separate taxes on business rather than relying exclusively on the major tax categories.
If the franchise tax was repealed, then Louisiana would improve from 39th to 37th overall on our State Business Tax Climate Index, which evaluates state tax structures. Moreover, its elimination would yield dramatic improvement in the state’s property tax ranking (which includes all taxes levied on a net worth basis), moving from 23rd to 8th.
Eliminating Louisiana’s problematic franchise tax would put the state in line with others that have either repealed, plan to repeal, or have made significant changes to their capital stock tax. Kansas phased out the tax prior to 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 its capital stock tax. Connecticut is also phasing its version down, and New York and Illinois have made substantial progress in this area of tax law and policy.
Applicable to tax years beginning January 1, 2025, SB 1 proposes franchise tax reductions by 25 percent each year that certain revenue targets are met, per the Louisiana Constitution and state statute. Tied to SB 1, SB 6 reduces the rebate rate under the Quality Jobs Program for each year that the franchise tax reduction is triggered, alleviating concerns regarding lost revenue resulting from the franchise tax phaseout.
Specifically, the Quality Jobs Program offers businesses a cash rebate for creating “well-paid” jobs and economic development in the state. While well-intended, programs like this seek to provide a remedy for otherwise unsound tax policy. Reducing this rebate program in conjunction with phasing down the franchise tax is not only responsible from a revenue standpoint but also enhances the state’s competitiveness overall. Generally, swapping a business incentive for the elimination of a tax that discourages capital investment is a positive change. While not scored separately, the rebate reduction is a structural improvement to the tax code and, by offsetting the taxation of capital stock, constitutes a pro-growth change.
Inventory Tax and the Industrial Property Tax Exemption Program (SB 2)
Generally, per the state constitution, business inventory in Louisiana is subject to property tax unless specifically exempted. In addition, through the Industrial Property Tax Exemption Program (ITEP), the state’s Board of Commerce and Industry, with gubernatorial approval, may enter into contracts to exempt new and expanding manufacturing facilities from this ad valorem tax. SB 2 would limit the exemption and begin a five-year phaseout of the inventory tax beginning in 2024.
As we have written in the past, these taxes are highly distortionary and force companies to make production decisions that are not necessarily based on economic principles. They further incentivize companies to seek out jurisdictions where they can avoid these harmful taxes. Like all taxes on tangible personal property (TPP), moreover, inventory taxes are taxpayer active, meaning that taxpayers must assess the value of their inventory for tax purposes, adding to tax compliance costs.
While eliminating the inventory tax yields a modest improvement to the state’s overall ranking, from 39th to 38th, much more significant gains are possible for the state’s property tax score, moving it from 23rd to 12th. Here, too, repealing a tax is far better than relying on an offset like the ITEP.
|Reform||Overall Score||Property Tax Score|
|Phaseout of the Franchise Tax||37||8|
|Phaseout of the Inventory Tax||38||12|
|Phaseout of Both Franchise Tax and Inventory Tax||36||4|
Source: 2023 State Business Tax Climate Index; Tax Foundation calculations.
Phasing out either the franchise tax or the inventory tax (and related incentives) would improve Louisiana’s rankings, but phasing out both would provide the most overall and property rank improvement. Of course, there are other tax reform measures currently under consideration that the state should pursue, but eliminating the franchise and inventory taxes would be a very positive development that could build on recent reforms.