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Stelly Plan

Act 88 (HB 31) and Act 51 (HB 36) by Representative Stelly reduce the personal income tax brackets and eliminate the excess itemized deduction and the current state sales tax on food and residential utilities. Effective January 1, 2003, the state sales and use tax on such items shall not exceed 2 percent, and after June 30, 2003, there shall be no state sales and use tax on such items.

• Current law provides for an individual income tax at the following rates for the following brackets:

  
    

• Representative Stelly's proposal would change the income tax bracket structure in the following manner:

  
    

• Estimates on the impact of the "Stelly Plan" have been completed by the Chief Economist in the Legislative Fiscal Office and by the accounting firm of Postlethwaite and Netterville APAC. Projections from both parties are very similar in their estimates, however there are differences in the way each scenario is presented. The Legislative Fiscal Office estimate presents the average return for all returns filed (single, married, and head of household) in each tax bracket. The scenario provided by Postlethwaite and Netterville presents four specific examples of a possible return for selected income brackets. Both of the scenarios are included in Appendix A of this document.

In summary, as estimated by the Legislative Fiscal Office, the net percentage tax change:

• is an attempt to represent the maximum combined effect of changes in both income and sales taxes relative to current tax liability;
   
• creates a net tax liability reduction on the average return earning less than $60,000 annually;
   
• provides for a net increase in tax liability on the average return of 1% in the $60,000 - $80,000 federal adjusted gross income bracket - the net dollar tax increase on the average return is estimated to be $9;
   
• provides for a net increase in tax liability on the average return of11% in the $80,000 - $100,000 federal adjusted gross income bracket - the net dollar tax increase on the average return is estimated to be $219;
   
• provides for a net increase in tax liability on the average return of 21% in the $100,000 - $120,000 federal adjusted gross income bracket - the net dollar tax increase on the average return is estimated to be $478;
   
• provides for a net increase in tax liability on the average return of 28% in the $120,000 - $140,000 federal adjusted gross income bracket - the net dollar tax increase on the average return is estimated to be $725;
   
• provides for a net increase in tax liability on the average return of 26% in the $140,000 - $160,000 federal adjusted gross income bracket - the net dollar tax increase on the average return is estimated to be $830;
   
• provides for a net increase in tax liability on the average return of 23% in the $160,000 - $180,000 federal adjusted gross income bracket - the net dollar tax increase on the average return is estimated to be $905;
   
• provides for a net increase in tax liability on the average return of 22% in the $180,000 - $200,000 federal adjusted gross income bracket - the net dollar tax increase on the average return is estimated to be $995; and,
   
• provides for a net increase in tax liability on the average return of 12% in the over $200,000 federal adjusted gross income bracket - the net dollar tax increase on the average return is estimated to be $1811.

The net tax liability for the average return in each income category would increase progressively above $60,000. The net percentage change the average taxpayer incurs begins to decline beyond $160,000. This is due to a fixed maximum effect resulting from bracket compression and the fact that excess federal itemized deductions grow more slowly than income grows beyond the income level of $160,000 per year. In addition, sales taxes paid do not grow in proportion to growth in income.

In Louisiana, approximately 20% of the residents itemized deductions in tax year 2000.

• State General Fund Impact of Stelly Plan Implementation
• As outlined in the Legislative Fiscal note for the Stelly plan (see Appendix B) the net impact is as follows:
   

  Fiscal Year	Sales Tax Loss	Income Tax  Gain	Net Impact
  2002-2003	$64 million	$55 million	($ 9 million)
  2003-2004	$240 million	$244 million	+$4 million
  2004-2005	$245 million	$263 million	+$18 million
  2005-2006	$249 million	$282 million	+$33 million
  2006-2007	$254 million	$304 million	+$50 million

The net revenue gain tends to increase over time because of the growth associated with the income tax (projected 7.5% per year trend growth).  This growth rate out-paces the growth rate of the sales tax on food and utilities (projected 1.8% per year trend growth) which explains why, after the first year, the State General Fund does not experience a loss – rather the net impact is positive.  The Stelly Plan generates revenue above and beyond current income taxes levels because the plan calls for the compression of income brackets and elimination of allowing the deduction of federal excess itemized deductions.

General Income Tax Information

States that do not tax personal income:

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

States that allow for the deduction of federal income taxes:

• Louisiana
• Alabama
• Iowa
• Montana

States that allow for the deduction of federal income taxes with some adjustments:

• Missouri
  Deduction is limited to $10,000 for joint returns and $5,000 for individuals
   
• Oklahoma
  The rate range reported is for single persons not deducting federal income tax. For married persons filing jointly, the same rates apply to income brackets ranging from $2,000 to 421,000. Separate schedules, with rates ranging from 0.5% to 10% apply to taxpayers deducting federal income taxes.
   
• Oregon
  Deduction is limited to $5,000
    
• Utah
  One half of the federal income taxes are deductible.
    

Federal Excess Itemized Deduction Allowances By State

* Massachusetts has state itemized deductions.
** Wisconsin provides for a credit allowed based on specific federal itemized deductions.

 Source: Louisiana Department of Revenue

STATE ADJUSTMENTS

• Alabama 
  Adjustments for medical expenses, state & foreign income taxes & other items.
   
• Arizona
  Adjustments for medical expenses.
   
• Arkansas
  Adjustments for medical expenses, state taxes, & charitable gifts.
   
• California
  Adjustments for state & foreign income taxes, federal estate taxes, interest, & other items.
   
• Delaware
  Adjustments for state & foreign income taxes, charitable mileage, & self-employed health insurance.
   
• DC
  Adjustments for state income taxes & certain deductions passing to shareholder of small business corporations.
    
• Georgia
  Adjustments for state income taxes & expenses connected with exempt income.
   
• Hawaii
  Adjustments for state taxes & other items.
    
• Iowa
  Adjustments for state taxes, charitable mileage, & other items.
    
• Kentucky
  Adjustments for state income taxes, charitable contributions, & other items.
   
• Louisiana
  Decreased by 50%.
   
• Maine
  Adjustments for state income taxes & other items.
   
• Minnesota
  Adjustments for state income taxes & other items.
   
• Missouri
  Adjustments for state income taxes & cultural contributions.
   
• Montana
  Adjustments for state income tax, insurance expenses, contributions, & other items.
   
• New York
  Adjustments for state & foreign income taxes, interest, & other items.
   
• North Dakota
  Adjustments for state income taxes & medical expenses.
   
• Oregon
  Adjustments for state income taxes, medical expenses, & other items.
   
• South Carolina
  Adjustments for state income taxes & other items.
   
• Virginia
  Adjustments for state income taxes & other items.

Source: Louisiana Department of Revenue