Louisiana Gov. Bobby Jindal (R) today released details about his 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. reform proposal, which we first discussed in January here. We’ve been communicating extensively with the Governor’s staff in recent months about ideas and the pros and cons of various possibilities, but it should be said that the Governor and his staff ultimately decided what mix of policies they considered best for Louisiana (as it should be). As much as I wish sometimes that I had the power to rewrite state tax systems, we stick to the role we’re best at: describing what policies can best create a simple, sensible tax system in line with good public finance principles that are supported by research and evidence.
The plan, as a whole, is a major step toward creating a pro-growth tax system that can work for Louisiana. Corporate and 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. es are generally considered the most destructive taxes to economic growth, and both have a great deal of complexity and compliance costs associated with them. I’m no fan of the cigarette tax increase portion and despite being a lawyer I’m all for lawyers having to pay 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. , but overall it’s a plan for a simple, stable, and modern tax system.
- Revenue neutral. Designed to raise as much revenue as the state does now, but through taxes that are less harmful to job creation and economic growth.
- Eliminates the state income tax. Despite a 6% rate on income over $50,000, Louisiana's state and local governments get just 14 percent of their revenue from the tax—the third lowest reliance among the states with an income tax. It’s a change that Louisiana can achieve.
- Eliminates 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. and the franchise tax. The state gets only about 2 percent of its revenue from the corporate income tax, so again not much reliance there. Franchise taxes are taxes on investment and capital accumulation and are widely recognized as destructive to economic growth.
- Broadens 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. and raises the state tax rate from 4.0 percent to 5.88 percent. (Including local sales tax; for example, the New Orleans sales tax will be about 10.9 percent, up from the current 9 percent.) The sales tax base would be expanded to many personal and professional services. Among the items remaining exempt are food for home consumption, utilities, prescription drugs, fuel, manufacturing machinery and equipment, farm and agricultural inputs, leases and rentals, trade-in value for new vehicle purchases, historical structure rehabilitation, non-profit organizations, government purchases, healthcare, education, construction, real estate, financial services, legal services, oil and gas services, funerals, and advertising. Additionally, any service providers with revenue under $10,000 per year are exempt.
- The cigarette tax, currently 40 cents per pack, would rise to $1.41 per pack (matching the Texas rate).
- Low-income families and retirees will receive a rebate to offset some of the impact of the higher sales tax. (Note: an earlier version of this post mentioned a $60,000 cut off – this is for retirees only).
- State and local sales tax bases will be made uniform, and all collection and administration across the state will be done by a new state entity. Retailers will thus face a streamlined sales tax payment process.
- An independent tax tribunal would be set up. Presently, taxpayers challenging the Department of Revenue must file lawsuits against the state in trial court. Instead, there will be a single Tax Court to hear all tax-related disputes.
- Maintains many targeted economic development programs. Louisiana spends hundreds of millions of tax dollars on things like film and television production incentives, which are poor policy.
- The plan would take effect January 1, 2014.
Jindal summarized his plan as six main points:
First, eliminating income taxes will give more control to the taxpayer. Taxing what people spend instead of what they earn gives taxpayers more control over their own money.
Second, eliminating income taxes will make Louisiana the best place to start a business. This is the best way to grow our economy and create good-paying jobs throughout the state.
Third, in our plan, everyone will pay their fair share, but no more than that.
Fourth, our plan will close special interest loopholes. Powerful special interest groups will no longer be able to rig the system. For far too long average Louisiana citizens have felt the state’s tax code works for the rich and powerful, but not for them. By closing special interest loopholes, we level the playing field for everyone.
Fifth, we are going to protect food, prescription drugs and utilities from increased sales taxes.
Sixth, and finally, by switching to a state sales tax base, there will be more stability in funding for government services. Stability breeds confidence. Switching to a more stable tax base can smooth out many of the rough edges and stabilize state budgeting, and stability in government attracts businesses and creates good jobs.
The plan is particularly responsive to key possible objections. One objection would naturally be from the services industry, which would want to keep its existing sales tax carveouts. I’m hopeful that the elimination of the income, corporate, and franchise taxes makes it a worthwhile tradeoff, but one never knows. In any event, it’s just not fair that retailers have to collect tax when they sell goods, while service providers don’t. This plan corrects much (but not all) of that inequity.
Another objection would be on equity grounds—that relying more on the sales tax and less on the income tax is a regressive move. The Governor’s proposed rebate program would remove the negative impact to low-income individuals and households. The sales tax base expansion applies mostly to services purchased by higher-income households, not low-income households. Finally, it must be said that Louisiana’s tax system ought to focus on creating the best environment for jobs and opportunity for everyone in the state, because what the distributional tables say doesn’t really matter if the economy isn’t growing and people aren’t working.
A final objection I hear sometimes is that states need a balance of revenue sources—I sometimes hear this described as the “three-legged stool.” This is the weakest argument because there is no evidence that having three types of taxes instead of two or one or four leads to revenue stability. In fact, California has the fifth most volatile revenue system despite having every major tax, and the state with the most stable revenue (South Dakota) has only a broadened sales tax (no individual or corporate income tax). What matters is how your tax system is designed, not how many taxes you have. California has a lot of taxes but they’re all badly structured with high rates and narrow bases. Louisiana aims to mimic South Dakota, with a better-structured and stable sales tax that grows with the economy.
We previously estimated that a plan roughly in line with what Jindal has proposed would have made Louisiana 4th best on our 2013 State Business Tax Climate Index, instead of 32nd. (Now that we have the details, we’ll put out an update soon.) This would primarily be because of the elimination of significant complexity, compliance burdens, and tax obstacles to long-term economic growth.
My colleague Scott Drenkard discussed the plan earlier on our podcast program here.Share