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Governor Jindal’s Bold New Tax Plan

2 min readBy: Scott Drenkard

I’ve spent a better part of my day today answering media queries about Louisiana Gov. Jindal’s new taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. plan, which is detailed here. His goal is to eliminate the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. , the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. , and the franchise tax. Details are still a bit scant, but according to initial reports and some conversations I’ve had with people on the ground in Louisiana over the past few weeks, the plan is to pay for this tax elimination by expanding the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. base to services and raising the rate on that tax. We’ll be issuing more analysis on this in the coming days, but I wanted to get a few thoughts out quickly and show how these changes would affect Louisiana’s score in the State Business Tax Climate Index. Bear in mind that these numbers are preliminary, and as we get more details, we’ll be tweaking our formula to incorporate them. For now though, all told, the changes would bounce Louisiana from 32nd to 4th overall on our list of tax structures (assuming the changes were in place as of July 1, 2012).

Table 1: Louisiana Business Climate Under Governor Jindal's Plan

Current Rank Jindal's Plan
Overall 32 4
Corporate 18 1
Individual 25 1
Sales 49 50
UIT 4 4
Property 23 7

This plan is a step in the right direction. Corporate and individual income taxes are generally considered the most destructive taxes to economic growth, and both have a great deal of complexity and compliance costs associated with them. Elimination yields a perfect score in those components of the Index.

The expansion of the sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. to services is probably one of the more groundbreaking components of this plan, and I’m hopeful that lawmakers in Louisiana will do it right. An ideal, neutral sales tax would tax all final sales at one rate and exempt all business inputs. For an explanation of this concept, click here.

This Index simulation in the sales tax component is actually a conservative one, because 1) I assume that the sales tax will increase to 7 percent, which is the stated maximum that the rate might go and 2) I assume that some of the problems with Louisiana’s sales tax base will not be addressed. I do this because we haven’t gotten the full details yet, so the sales tax score (and overall score for that matter) may improve if policymakers bring the rate down further or address some of those base problems.

Finally, Jindal’s plan would eliminate the franchise (or “capital stock”) tax, eliminating bad incentives toward accumulating addition capital and growing companies. This improves their property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. score greatly in this component, from 23rd to 7th.

We’ll be following this plan closely.

For more on Louisiana, click here.

Follow Scott Drenkard on Twitter @ScottDrenkard.