Louisiana Tax Reform Explained: What the New Tax Code Changes Could Mean for You

BATON ROUGE, La. (KPEL News) - In a significant move Republicans, including Gov. Jeff Landry, say will simplify Louisiana’s tax code, House Bill No. 1 has been approved by the Louisiana House and is now headed to the Senate.

This legislation proposes a major overhaul, introducing a flat income tax rate and making other adjustments to deductions, credits, and exemptions.

READ MORE: Louisiana Residents Could Soon See New Taxes on Streaming Bills

But while there are a lot of talking points going around about what the bill would do, what it wouldn't do, and how it might affect you, we've broken down the bill into its most basic terms.

1. Introduction of a Flat Income Tax Rate

Under current law, Louisiana’s income tax operates on a graduated rate system, where the tax percentage increases as income rises. HB1, however, replaces this structure with a single flat rate of 3% for individuals, estates, and trusts. This means all income levels will be taxed at the same rate, simplifying the calculation for taxpayers and potentially reducing the burden on higher earners.

2. Increased Standard Deduction for Individuals and Families

The bill increases the standard deduction for all filing statuses:

• Single filers and married individuals filing separately will see their deductions jump from $4,500 to $12,500.
• Married couples filing jointly, heads of households, and surviving spouses will receive a deduction of 200% of the single filer rate, translating to $25,000.

These deductions will also be adjusted annually, starting in 2026, based on the Consumer Price Index (CPI) to account for inflation.

3. Expanded Tax Exemption for Retirement Income

Louisiana residents aged 65 and older have historically received a tax exemption on $6,000 of annual pension or annuity income. This bill doubles that exemption to $12,000, which will also be adjusted annually for inflation starting in 2026. This change is particularly beneficial for seniors on fixed incomes, allowing them to keep more of their retirement earnings.

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4. New Bonus Depreciation and Amortization Options

Starting in 2025, Louisiana taxpayers will have the option to take a "bonus depreciation" deduction on qualified business property. This means businesses can immediately deduct the full cost of certain property or improvement expenses, rather than spreading deductions over several years. Additionally, "bonus amortization" will allow businesses to deduct the full cost of qualifying research and experimental expenditures in the year they are incurred.

5. Removal and Reduction of Certain Credits and Deductions

House Bill No. 1 also streamlines tax credits by reducing or eliminating several existing ones, including:

• A credit for educational expenses and one for long-term care insurance premiums.
• A series of specific credits, including those for employment-related expenses for disabled dependents, accessible design elements in new constructions, and employment of certain nonviolent offenders.

The goal of these eliminations is to reduce administrative complexity and focus on broader, more impactful exemptions and deductions.

6. Automatic Income Tax Rate Reductions Based on Revenue Growth

If Louisiana’s general fund revenue exceeds certain benchmarks starting in 2026, the income tax rate may be further reduced automatically. Each time the revenue exceeds the base year amount by $374 million, the tax rate will drop by 0.25%, subject to CPI-based adjustments. This mechanism ensures that as Louisiana’s economy grows, taxpayers could see potential savings.

7. Accelerated Sunset of Certain Tax Credits

Several tax credits, including those for digital media production, sound recording investments, and historic building rehabilitation, are set to expire sooner than previously planned. HB1 establishes a new cutoff date of June 30, 2025, for applying for these credits. Programs like the Quality Jobs and Enterprise Zone programs will also see application deadlines moved up to June 30, 2025, instead of the previous 2026 deadlines.

What's Next for Louisiana's Tax Code?

If passed by the Senate, this bill will represent a significant shift in Louisiana’s tax landscape. By simplifying the tax code, establishing a flat tax rate, increasing standard deductions, and offering incentives for business investment, HB1 aims to create a tax system that is easier for residents to navigate and potentially more competitive with neighboring states. This overhaul could benefit many taxpayers, particularly families and seniors, while also supporting economic growth through business-friendly provisions.

If you want to see a more detailed breakdown, see below for what the current tax code calls for and how the proposed code compares.

HB 1: Flat Tax - Passed, Headed to Senate

The legislative text outlines a proposed Louisiana state income tax reform bill with key modifications, primarily aiming to simplify the tax structure, expand standard deductions, and reduce or eliminate certain credits and deductions. Here’s a breakdown of its major components:

1. Flat Income Tax Rate

• Current System: Louisiana has a graduated tax rate system for individuals:
  • 1.85% on the first $12,500 of net income
  • 3.5% on the next $37,500
  • 4.25% on net income exceeding $50,000
• Proposed Change: Replace the graduated rates with a single, flat 3% tax rate for individuals, estates, and trusts. This shift aims to simplify tax calculations.

2. Automatic Rate Reduction Mechanism

• Current System: Tax rates can reduce if certain economic conditions are met.
• Proposed Change: The bill modifies the conditions for rate reduction. If the state’s general fund revenues exceed a baseline amount ($12.155 billion) by increments of $374 million, the tax rate will decrease by 0.25%. This will be adjusted yearly based on the Consumer Price Index (CPI).

3. Standard Deduction Increases

• Current System: Personal exemptions are $4,500 for single filers and $9,000 for joint filers.
• Proposed Change: Increase exemptions to:
  • $12,500 for single and married-separate filers
  • $25,000 for joint filers, surviving spouses, and heads of households
• These deductions will also be adjusted annually starting in 2026 based on the CPI.

4. Repeal of Certain Deductions and Credits

• Repealed Deductions: The bill removes several deductions, including those for net capital gains, expenses related to foster care adoption, private adoption, educational expenses for dependents, small-town health professionals, and bone marrow donation.
• Repealed Tax Credits: Credits set for elimination include those for long-term care insurance, bulletproof vest purchases, living organ donation, and the hiring of nonviolent offenders, among others.

5. Increased Retirement Income Exemption

• Current System: $6,000 of retirement income is exempt from state income tax for those aged 65 and older.
• Proposed Change: Increase this exemption to $12,000 with annual adjustments based on CPI.

6. Bonus Depreciation and Amortization

• The bill introduces optional bonus depreciation and amortization deductions, allowing taxpayers to immediately deduct certain expenditures related to property or research and development. This provision aligns with similar federal tax incentives.

7. Impact on Corporate Entities and Flow-Through Entities

• Tax on Flow-Through Entities: S-corporations and other pass-through entities can elect to be taxed as C-corporations. The proposed bill applies a flat 3% rate instead of the previous graduated rates, aligning with the individual income tax simplification.

8. Termination of Several Tax Credit Programs

• The bill accelerates the termination dates for several Louisiana tax credit programs to June 30, 2025. Programs affected include:
  • Motion Picture Production Tax Credit
  • Research and Development Tax Credit
  • Angel Investor Tax Credit
  • Digital Media and Software Tax Credit
  • Historic Structure Rehabilitation Credit

9. Enterprise Zone and Quality Jobs Programs

• Enterprise Zone Program: The deadline for accepting applications moves from July 1, 2026, to July 1, 2025.
• Quality Jobs Program: Similarly, this program’s advance notification deadline is adjusted to June 30, 2025.

10. Effective Date

• This bill, if signed into law, will apply to tax periods beginning January 1, 2025. It becomes effective immediately upon the governor’s signature or after the standard period if the governor doesn’t act.

This bill represents a significant shift in Louisiana’s tax code, simplifying income tax with a flat rate, adjusting standard deductions, and curbing various tax credits and exemptions, which may reduce administrative complexity but could also affect tax liabilities for certain residents.