Louisiana has many of the right characteristics for families to flourish. This includes abundant natural resources and thriving petrochemical, oil and gas, and tourism sectors. In fact, New Orleans was recently ranked as the 9th fastest-growing city for 2022 by the American Growth Project. They note that the worker shortages in New Orleans “could indicate the city has even more room to grow in coming years.”
But there’s substantial room for improvement as people and businesses are leaving the state. A big part of that is because of the poor state business tax climate that the Tax Foundation recently ranked as the 12th worst in the country. If it’s too costly to run a business, then employers and workers will go elsewhere.
This is especially true when it comes to personal income taxes. Louisiana should join the many states in the flat tax revolution to avoid the negative effects this tax has on people’s livelihoods.
This year, four states passed a flat personal income tax, making a soon-to-be total of 14 flat income tax states across the nation. One of them is Louisiana’s neighbor, Mississippi, currently ranked 30th in business tax climate. With a flat income tax, Mississippi's status will improve, but not as much as it could if it also eliminated the personal income tax altogether. Even the improvement of flattening income taxes won't support as much prosperity as eliminating them.
The nine states without personal income taxes, including nearby Texas and Florida, show better economic growth, domestic migration, and non-farm payroll employment when compared to flat-tax states. Uncoincidentally, Florida ranked 4th best and Texas 13th in business tax climate.
High personal income taxes contribute to Louisiana’s northern neighbor, Arkansas, ranking 40th in business tax climate, and the progressive darlings of California and New York ranking 48th and 49th, respectively. Personal income taxes in the business tax climate index rank 25th in Louisiana, 37th in Arkansas, 49th in California, and 50th in New York.
But the marks against Louisiana don't stop there.
The latest edition of the Rich States, Poor States report from the American Legislative Exchange Council, which notes the economic performance of the 50 states based on economic output, migration, and job creation from 2010 to 2020, reveals that Louisiana ranks last.
The report also compares the upcoming economic outlook for all the states across 15 policy variables, which put Louisiana at 20th, still behind Texas (11th) and Florida (8th), but above Mississippi (27th), although that will likely change in the next report given Mississippi's new flat tax policy.
What continues to show up as a contributing factor for Louisiana's lackluster tax policies and economic performance, when compared to its neighboring states, is a hefty burden of personal income taxes. People are fleeing states with high personal income taxes for good reason.
Progressive personal income taxes disincentivize work, as people's hard-earned money, that's already being devalued by the current 40-year high inflation, decreases even more. Naturally, people gravitate toward states where they can keep more of what they make.
What's a state to do for funding once personal income taxes are eliminated?
One poor answer to fund government spending is with higher property taxes. This is a weak spot to the overall tax system in some states without personal income taxes, like Texas, which are a result of excessive local government spending. The better answer that many no personal income tax states primarily depend on for funding is consumption-based taxes.
A flat final sales tax with the broadest base and lowest rate possible is best. Although taxing consumption results in less consumption, the benefit is that people save more, which allows for more capital and economic growth.
If Louisiana hopes to see more economic growth and thriving people in its state, like the recent growth in New Orleans, flattening personal income taxes should be a top priority until their ultimate elimination.