Governor Jindal’s Bold New Tax Plan

I’ve spent a better part of my day today answering media queries about Louisiana Gov. Jindal’s new tax plan, which is detailed here. His goal is to eliminate the corporate income tax, the individual income tax, 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 tax 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 32^nd to 4^th 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

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 base 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 tax score greatly in this component, from 23^rd to 7^th.

We’ll be following this plan closely.

For more on Louisiana, click here.

Follow Scott Drenkard on Twitter @ScottDrenkard.