Governor’s office could cap income taxes rather than eliminate them

18th February 2013   ·   0 Comments

By Christopher Tidmore
Contributing Writer

Last week, defenders of the Jindal Administration’s tax reforms were quick to note the latest findings of the Rasmussen Polling Service. Forty-three percent of Americans view sales tax as the fairest way of collecting revenue, compared to just 26 percent who support the income tax. The pursuit of an income-sales tax swap here in Louisiana seemed not only to have local majority support, but national pluralities as well.

And, surrogates for the governor including Revenue Department Executive Council Tim Barfield also privately observed that no critic of the governor’s tax reform proposal has yet been able to answer Louisiana’s fundamental competitive weakness: that Texas and Florida have no income taxes. Each state enjoys an advantage in attracting business that Louisiana cannot match no matter how good any other of our competitive factors improve.

Even the response that both states rely on higher business fees and property taxes to make up the difference has done little to slow Jindal’s momentum towards a major income tax repeal in favor of a sales tax hike in the April legislative session.

The road to a two-thirds majority needed for passage may have experienced a curve this week with the news that the Jindal Admini­stration is considering taxing services as a means of keeping any sales tax increase at near or below two pennies on the dollar.

Meeting with legislators late on the eve of Carnival’s final weekend, Jindal staffers revealed that the governor will send a bill to the House and Senate to increase the state sales tax rate to 5.78 percent from the current 4 percent. However, there was a twist. Right now, most sales taxes remain mostly limited to retail level products. If most all services are also taxed, millions of dollars in extra revenue would emerge. Add the governor’s other proposal to eliminate most exemptions from oil exploration taxes, and an income-sales tax swap could be revenue neutral at a relatively small increase.

Without including services, sales taxes would have to rise by 4.5 cents rather than just less than two just to produce the funds necessary to kill both the income and corporate levies. However, when asked what services will be taxed, the only example from Team Jindal is “landscaping.”

Frequent Jindal critic C.B. Forgotston noted, “Sales taxes are paid by the consumer, but collected by the vendor (of goods or services) who must remit them monthly or quarterly to the state. Consider the neighbor’s child who makes his spending money in the summer cutting yards in the neighborhood. That child will now be required to fill-out forms and remit the sales tax money to the state.”

“Perhaps it will be a good learning experience,” Forgotston continued. “Or perhaps their parents will help with the forms. The next time you go to your barber, hair stylist or nail salon ,ask the proprietor what they think about expanding into the state tax collection business.

“I’ve heard from several physicians who like repealing the income tax and replacing it with sales taxes. Obviously, they have no problem with collecting sales taxes on their services.”

Interestingly, though, Forgotston noted that the only services Jindal has specifically ruled out taxing are legal and accounting.

“That makes perfect sense, politically. Taxing services will require a two-thirds vote of the lege and the legislation must start in the House of Representatives. The chairman of the House Ways and Means Committee (the tax-writing committee) is a CPA. The president of the Senate has an accounting business and half the leges are lawyers.”

Faced with a sales tax hike that would not only put Louisiana with the highest levy in the nation, and perhaps force an underground market on certain items, some of the skeptics of Jindal’s proposal have begun to suggest alternatives.

In a column two weeks ago, Gambit’s Clancy Dubos suggested that Jindal instead focus on implementing a flat tax in Louisiana. Presumably, closure of loopholes and deductions would fund both the elimination of the Corporate income tax and lower aggregate rates for all citizens. A Flat Tax would impress the national conservative base, Dubos argued, aiding Jindal’s pursuit of the 2016 GOP Presidential nomination, and would go far to improving Louisiana’s business climate without massive sales tax increases.

It is not a bad start, or a bad message of reform to send. Jindal would look good touting a flat tax on the pages of Forbes magazine, and some economic forecasters would rank Louisiana slightly higher in the “friendliness to business” category.

The problem with the concept, though, is three-fold. Primarily, there are not enough deductions available in the La. Code to generate enough revenue to both eliminate the corporate income and franchise taxes—and lower rates significantly. Secondly, the middle class rebellion the last time deductions were rolled back under the Stelly Plan helped get Jindal elected. His loyalist supporters are certainly not a constituency who’s ire the governor seeks to trigger.

Thirdly, a flat tax does not answer Louisiana’s fundamental liability in attracting wealth. Sports stars and corporate titans move to Florida and Texas for the very reason that the tax system is regressive when measured against most states. In both, rich people enjoy very little taxation comparatively, and the effect resembles an economic magnet. Those fleeing from taxation on their incomes, also typically spend massive consumption and investment capital in those sunbelt states–an economic win.

These magnates don’t want a more “fair” tax system. They want no tax. Any income tax, and they stay away. So does their money.

Moreover, for the less plutocratic, both Florida’s and Texas’ lack of taxes on income matched with warm weather and the consequent sportsmen’s opportunities makes them retirement havens. To passively tax income for retirees, even in a flat fashion alone, provides the wrong impression for a fellow sunbelt state seeking a piece of the Grey-haired action.

Jindal defenders note that the governor cannot politically embrace a property tax solution as a means of providing parity. While the state constitution does allow for up to a ten mills property tax outside of the homestead exemption, any governor who attempted such a move would face near riots in the body politic. (And, regardless, the Rasmussen poll only put national support for property taxes at 6 percent.)

However, these gubernatorial surrogates ignore that there might be a progressive middle ground between a simple sales tax hike and a flat tax reform that provides the best of both worlds.

Corporate income and franchise taxes currently generate $300 million for the Louisiana budget. A hike of a half penny in sales taxes brings in roughly $325 million or easily constitutes a revenue neutral change.

Apply the extra $25 million to eliminating the 2 percent income tax bracket. Another half penny in sales tax would guarantee its phase out and allow the four percent and six percent brackets to be raised to a threshold that only taxes individual incomes above $60,000.

For a one-cent hike in sales taxes, roughly three quarters of Louisianians would be removed from the tax rolls, according to some estimates. Governor Jindal has also proposed up to a one dollar increase in taxes on packs of cigarettes. A Kaiser Health survey estimated seven years ago that would provide the state with approximately $168 million in revenue.

That sum is almost exactly the amount that Louisiana currently collects in personal income taxes from those over the age of 65. When one considers the revenue already funded in the phase out of the two percent bracket, for just this $168 million, anyone over the age of 60 and below the age of 30 could be taken off the tax rolls altogether.

That answers two of the Pelican State’s most vexing economic development questions: how to incentivize our young people, particularly our aspiring, upwardly mobile entrepreneurs under 30, to stay; and how to draw back those who have left when they reach retirement age.

Lastly, put bluntly, Louisiana needs more billionaires. Or, at least, millionaires to invest and spend their fortunes here rather than in Houston or Orlando. Former Governor Mike Foster, himself no stranger to taxes on high and inherited wealth, proposed at maximum limit on income taxation at $50,000 collected. The impact to the state treasury would be negligible, but the maximum limit would send the signal to wealth creators everywhere that they would be welcome here, for the amount that high property taxes usually cause them to pay in Florida or Texas.

A modest five to 10 cent increase in the beer tax (which has not gone up since the 1950s) would allow this income tax threshold to fall between $25,000 and $30,000, making Louisiana as competitive for wealthy migrants as any other state which levies no income tax.

The proposal accomplishes most of the governor’s goals, and would send a forceful message to the nation of Louisiana’s willingness to be open for economic expansion. Plus, it offers opponents of the simple tax swap, and the resulting high sales tax regimes, an alternative for which to argue.

Should Jindal wish to go further, and turn our four percent and four percent income tax rates into a simple three percent flat rate, that could be accomplished by another one penny increase in the sales tax, or 3/4 of penny, along with a phase out of the itemized deductions. Considering what occurred when Vic Stelly proposed the same, though, the governor might wish to consider other alternatives.

Regardless, raising the state sales tax by one cent on just retail items, and hiking certain sin taxes, accomplishes much of the same goals as phasing out the personal income tax altogether. Louisiana would not be branded with the progressive stigma of possessing the highest sales tax in the nation, but could boast of a much more competitive tax regime on the pages of Forbes.

Not a bad platform for an aspiring GOP Presidential contender.

This article was originally published in the February 18, 2013 print edition of The Louisiana Weekly newspaper