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Time for Louisiana to give remaining broken Stelly Plan a decent burial

brokeThe invaluable Tax Foundation’s latest report on sales taxes placed Louisiana in the third-highest spot for combined state/local rates, having only the 38th ranked state rate but the highest weighed local rate. In fact, in a sense, the state rate is both not high enough and too high, courtesy of the remaining part of an unwise constitutional change almost a decade ago.

 

 

While lower rates in any form of taxation are preferred, taxation itself is a necessary crime of theft in order for government to operate. But if we are to allow government to take our property, the general immorality of that is mitigated by making sure the burden is borne equitably by making sure it is done the most efficiently – in the manner that is least costly and most likely to encourage economic development that therefore brings wealth to all who contribute by their participation in creating that wealth. That is, nobody should be under- or over-taxed relative to their contributions to societal wealth creation.

Unfortunately, Louisiana’s present system violates efficiency rules. Most egregious at the state level is its refusal to collect from a broad base with undifferentiated rates. Its income tax is graduated and pockmarked with exceptions, while its sales tax exempts certain considered essential commodities and is subject to various tax-free calendar dates (such as the one this coming weekend). This distorts collection through avoidance strategies and wastes resources in pursuance of those strategies. Particularly with the sales tax, it misses opportunities to collect more without dampening economic development by ignoring the elasticity of taxable goods, and with income taxes it discourages investment and encourages debt.

To be more specific in the case of the state sales tax (the income tax this space has dealt with previously), the exemption of unprepared food, pharmaceuticals, and utilities creates great inefficiency (triggered by the part not yet repealed of the “Stelly Plan”). Its approach is exactly the opposite of what should occur with basic goods of low elasticity (that is, fairly demand-invariant even as supply changes) – it doesn’t need to not tax these, but actually to tax these and at a higher rate than other commodities. The same goes with relatively inelastic luxury items with significant external costs, such as tobacco, liquor, and gambling, which are largely currently taxed at a higher rate but could go higher still.

Thus, what the state could do is lower the state rate, say to two percent, but charge it on everything (that would require constitutional amending), which probably offsets in total revenue overall (or whatever figure is necessary to make it revenue-neutral, as long as the rate is flat). While this would have the effect of a tax increase on poor households for many items, it also might save them in taxes by getting them to shift their consumption away from non-essential items because of the now-greater cost of the essential items, which might lead to better decision-making in their personal lives geared more to the long-term and encouraging more investment rather than consumption. For wealthier households, depending on consumption patterns, this might be an aggregate tax cut, a portion of which will find its way into greater investment.

These habits may be amplified by raising so-called “sin” taxes, making the costs of these behaviors higher with the goal of ending consumption (because of their inelasticity, users are much more likely to hit an inflection point where for many of them their habit gets so expensive they simply quit, being unable to reduce intake). This also may end up being revenue neutral, as the higher rates take in more but from a smaller and smaller base, but almost certainly will reduce societal costs stemming from the decline of this behavior (and likely exceeding additional costs of compliance).

Note that all of these must occur together; separately, they create different inefficiencies. For example, simply getting rid of the exemptions without overall state sales tax reduction does not promote shifting of consumption habits and encouraging investment. Hiking sin taxes in isolation, without lowering costs for alternative consumption pathways through sales tax flattening, might drive compliance costs too high.

The stratospheric local sales tax is another matter. While the state sales tax of all state-generated revenues, a little under 30 percent, is about at the median for all states, local governments rely heavily on the sales tax because most local governments have to comply with the nation’s highest homestead exemption, making per capita collection one of the lowest in the nation. While the state does put caps both on the highest combined local sales tax and property taxes allowed, the best strategy here would be to lower the exemption and the maximum levels charged for the combined local sales tax, and perhaps the combined property taxes (constitutional amending would be needed), again with the goal of revenue neutrality.

Overall, Louisiana’s sales taxes are too high, both in an absolute and, as the report showed, comparative sense. But some portion of it (along with its relative sin taxes) should be raised while the remainder lowered, both for the practical reason of efficiency’s sake, and for the moral reason that tax policy should allow in aggregate people to keep more of what is theirs and to give them incentives to push consumption towards the future – investing.

by Jeffrey Sadow, read his daily blog at Between the Lines

 

 

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Jeffrey Sadow

Jeffrey Sadow is an associate professor of political science at Louisiana State University in Shreveport.   He writes a daily conservative blog called Between The Lines

Website: jeffsadow.blogspot.com/

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