Governor Jindal recently caused quite a stir by announcing his major initiative for 2013 will be to swap the personal income tax and certain corporate taxes for other taxes, most notably a significant increase in the state sales tax. While the name may sound simple, there is nothing simple about tax reform. In some quarters, politicians use “tax reform” as a euphemism for raising taxes. Even if it involves changes that are truly revenue neutral, it always consists of taking something from someone who has it and giving it in some form to someone else who wants it. There is always a monetary transfer at play. That usually means that some constituents will be happy with the proposals and others will be unhappy. Legislators rarely look forward to such encounters.
From an economic development standpoint, many experts say that Right-to-Work states with no income tax are at the top of the nation in economic development. Louisiana is a Right-to-Work state but our tax code contains both personal and corporate income taxes. Many businesses’ income taxes flow through on the personal income tax of their owners since they aren’t corporate entities. Removing the personal income tax would also eliminate the income taxes of those businesses. Corporations are another matter. Those entities pay both an income tax and a franchise tax. All businesses pay sales taxes, and business and commercial interests pay over 80 percent of the property tax in Louisiana.
It is interesting to note that both the personal income tax and the state sales tax currently collect about $2.5 billion each for the state treasury. State officials could replace the personal income tax with a sales tax increase by doubling the state sales tax rate, currently four percent, with current exemptions in place or a combination of a smaller rate increase and the elimination of many transactions not currently subject to the sales or use tax. Such a proposal would no doubt be controversial. Some would love it and some would hate it, which is generally the case with major tax reform proposals.
The governor’s concept is just that at this point: a concept. Nothing is in writing for review. Whatever legislation his team drafts will undoubtedly be the most reviewed and analyzed bills in recent legislative history. Businesses, individuals, local governments and others will parse every page, every paragraph and every word with a calculator nearby to fathom the impact on their finances. Tax reform means that both candy and castor oil will be on the table. Folks will want to know how much of each they are getting and how the package will be tied together to insure that the candy and the castor oil are distributed fairly. Politically, the governor will have to weigh how many of his initiatives can be accomplished with a simple majority vote and how many will require a two-thirds vote and perhaps a vote of the people as well.
Louisiana’s tax system certainly isn’t perfect and undoubtedly can be improved. Experts say low rates, a broad base and elements that reward—not impede—economic growth and stable government revenues are the hallmarks of a good system. It is easy to come up with such a plan at a think tank. It is much more challenging to achieve in a legislative environment.
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