Jindal seeks income — sales tax swap but is there a better option?
28th January 2013 · 0 Comments
By Christopher Tidmore
An impromptu editorial board meeting convened recently when WBOK 1230 AM afternoon host John Slade dropped by the offices of The Louisiana Weekly.
The homecoming for this newspaper’s former political cartoonist turned pensive when the free-ranging conversation meandered to Bobby Jindal, the state’s budgetary problems, and the hopes that many enjoyed across the political spectrum when he first ran.
For all of the talk, Slade finally observed, “The only way this state’s budget will ever be solved is if we have good paying jobs for people to work at.” The implication was that Jindal had really done nothing to create such an economic environment; that the Governor was bereft of big ideas.
It has been a criticism levied from both the left and the right. And, that observation led to a further implied question which was, was Bobby Jindal courageous enough to have a big idea on creating jobs, and was there anything that a Chief Executive could really do to fundamentally change the economic direction of the Pelican State?
Little did we know at the same moment as our editors spoke with Slade, Jindal had assembled the legislative leadership at the Governor’s Mansion to propose such a very big idea—and an answer to John’s essential questions. Jindal has asked the House and Senate to abolish the corporate and personal income tax, when they meet in April, as a means to make Louisiana competitive with Texas and Florida, who are shackled with neither.
Unlike both states, Louisiana’s governor ruled out levying a state property tax (allowed by our state’s constitution up to 10 mills but never enacted). While the details were not confirmed as this newspaper went to press, Jindal plans to ask the legislature to hike the sales tax substantially, as much as three cents, and increase sin taxes, such as the cigarette tax by as much as .70 cents per pack. Some argue that increases could amount to as much as a dollar to achieve revenue neutrality under Jindal’s proposal, with similar, if smaller, increases also hitting alcohol and cigarettes.
Economists have clearly stated that the Pelican State’s high top marginal income tax of six percent, higher than Massachusetts in point of fact (with its nine percent corporate rate rivaling top taxing states: California and New York), has been a deterrent for business.
Louisiana has the shame of being the only Sunbelt state that did not enjoy the spectacular growth of the others throughout 1990s and 2000s, and veritable lists of corporations have said that they preferred the low tax nature of the Lone Star and Sunshine States to that of ours when search committees have come on their evaluation junkets.
In a press release, the Governor’s Communications Director Kyle Plotkin argued, “The facts show that more companies and more people move to states with no income tax or low income tax rates as compared to states with higher tax rates.
The majority of states ranked in the top five for all major business tax climate rankings do not have a personal income tax. In Chief Executive Magazine’s survey of 650 business leaders in their ‘Best/Worst States for Business’ ranking, four out of the top five states do not have a personal income tax, [and in the magazine’s] ‘Best Business Tax Climate’ ranking, four out of the top five states do not have a personal income tax.”
Moreover, he added, “In Area Development’s ‘Corporate Tax Environment’ ranking, the states ranked first, second, and third do not have a personal income tax, [and] In Business Facilities’ ‘Best Business Tax Climate’ ranking, none of the top five states have a personal income tax.
He quoted The Washington Times’ Richard Rahn, “[T]he evidence is very strong that people are moving from high-tax states to lower-tax-rate states – the migration from California to Texas and from New York to Florida being prime examples.”
Louisiana has experienced out-migration stats that rivaled California prior to Hurricane Katrina, and for several years thereafter exceeded that state.
Still, Florida, Texas, and the other nine states without an income tax achieve that utilizing a mixture of sales and state property taxes — with individual counties levying a far higher rate than seen in most Louisiana parishes. (All except New Hampshire, which levies only property taxes.)
The middle class burden of taxation ranks higher than in income tax states, but the sales rate is near Louisiana’s or below. The poor do not carry the majority of the burden. From what has leaked about Bobby Jindal’s plan, they might.
While the final outlines of the Governor’s proposal remain unknown, the three cent increase bandied about will give Orleans Parish residents a twelve percent sales tax, with as much as 12.8 percent on many CBD and French Quarter restaurants.
Putting that figure in perspective, the sales tax rate in Chicago is 9.5 percent. Nearby Mississippi generally charges an equivalent 9 percent, and Texans already pay less than we, at 8.25 percent.
Sources close to the governor have also said that his legislation might also take the opportunity to rid the state of its uncompetitive oil severance and extraction taxes, which has slowed Louisiana from participating in the fracking exploration boom elsewhere in North America.
As Good Government Advocate C.B. Forgotston noted to this newspaper, Jindal would have to raise sales taxes far more than three cents if he wanted to replace all three taxes, and still not tax food and utilities (currently prohibited by the State Constitution in wake of the Stelly Plan).
Forgotston also said that the Individual Income Tax produces $3 billion, the Corporate Income and Franchise taxes bring in $300 million, and the Oil and Gas extraction taxes amount to $700 million of the state budget. And, though the Governor has said that the tax swap would be revenue neutral, Forgotston estimates that the revenue shortfall for fiscal year starting July 1, 2012 is $1.2 billion.
As he put it, “It will take $5.2 billion in sales taxes to maintain the budget status quo (no growth). A penny in state sales tax brings in approximately $750 million. Thus, an additional state sales tax of 6.9 cents is required. That would mean a total of 10.9 cents in state sales taxes. The combined average local and state sales tax would be 15.9 cents.”
Louisiana currently has the 3rd highest combined state and local sales tax rate in the nation. Jindal’s tax swap would put us in first place by 6.45 cents more than the next highest taxed state. The issue is: at what point does total sales tax overtake the economic benefit of eliminating the above listed taxes? In other words, as the late U.S. Senator Russell Long said don’t tax you, don’t tax me, tax the man behind the tree; at what point are we the man behind the tree?”
Jindal has said that, “Our goal is to eliminate all personal income tax and all corporate income tax in a revenue neutral manner,” indicating he is not worried about the $1.2 billion deficit. Even subtracting the 1.5 cents, though, shoppers would still face what amounts to a 14.4 cent combined sales tax rate. Of course, that sum pails in comparison to what European Continental ratepayers see every day. The VAT is typically 18 percent in the euro zone, and 20 percent on most items in Great Britain.
Still, the rate would likely render most businesses within a thirty minute drive of the state’s borders insolvent, as motorists decided to cross the frontiers to shop in Mississippi or Texas, saving more in sales taxes than they would spend in gasoline.
And were the Governor to maintain the popular movie tax credits and business sales tax exemptions the rate would likely be driven even higher.
Moreover, Jindal’s Revenue Secretary Tim Barfield has said that the governor is also considering adding an Earned Income Tax Credit to the package. This monthly or yearly check would go to the working poor as a way to compensate them for the impact to their living standards of the drastically higher rate. It might make the governor’s proposal more progressive and friendly to the poor, but it would also make the 12-cent on the dollar sales tax rate impossibly too low to pay for such a commitment.
The Governor’s staff has indicated that they might be inclined to ameliorate the increase through the imposition of so-called “sin taxes”.
This is a new position for the governor.
In 2011, Jindal vetoed the renewal of a 4-cent tax on tobacco, saying he had “made a commitment to the taxpayers of Louisiana to oppose all attempts to raise taxes.”
However, aides have said that the governor would consider raising the tobacco tax if it was part of a revenue-neutral package, perhaps as much as 70 cents to a dollar.
Alcohol and beer tax hikes, previously a verboten topic on the fourth floor of the capital building, are also under consideration. Louisiana has not increased taxes on beer since the 1950s.
So, if the Governor is willing to explore tax increases previously off limits, and take on powerful lobbies in Baton Rouge to do so, perhaps he might also be willing to embrace an idea once posed by another Republican governor and championed most recently by his Democratic Rival PSC Commissioner Foster Campbell.
The Oil Processing Tax has been a recurrent theme in Louisiana political discussion for decades. Billions in petroleum are refined in Louisiana, in chemical plants along the Mississippi River, only to be shipped out with nary a dime paid for the privilege. This despite the huge environmental impact of processing which is as often as much as 60 percent of the nation’s petrochemicals.
Jindal’s gubernatorial rival Foster Campbell proposed abolishing the personal income and corporate income taxes by levying a fee on the oil processed by the refineries. The PSC Commissioner argued that EPA regulations make it nearly impossible for the plants to relocate out of state, and such a duty on the petroleum would be passed on to consumers in other states, producing enough revenue to do away with the income taxes –and provide for Campbell’s large spending initiatives.
The total math did not exactly add up, but Campbell’s essential proposal was hardly new.
Former Republican governor Dave Treen had proposed something similar. His “oil transfer tax” would have put a levy on the petroleum that flowed through pipelines across the state, rather than refineries, but it operated in a similar fashion.
Still, Treen believed it would be enough to abolish the income tax on retirees and pay for extensive coastal restoration and hurricane storm protection — a subject upon which he was uniquely prescient prior to Hurricane Katrina.
Some argue the federal constitutionality of the latter, wondering if that would create an internal tariff, a ‘no-no’ under the interstate commerce clause since McCulloch v Maryland . Still, Treen introduced the idea as part of a package to eliminate the income tax had merit.
Former Democratic candidate for Governor Phil Pries also made an argument but for a much more modest processing tax than Campbell’s multi-billion dollar proposal. Under Pries’ plan, a $500 million dollar per year duty on the refineries would last for seven years. He reasoned that a refinery could relocate, but it would take that amount of time to achieve EPA approval. Matched with the billions in infrastructure to construct a new plant, should the tax phase out in Louisiana in seven years, most chemical plants would pay the levy and still opt to stay.
Pries wanted to create a fund to build more schools, but such a temporary tax could fun the transition costs of Jindal’s proposal.
Dan Borne and the Louisiana Chemical Industry would scream loudly through the corridors of the Capitol, but the Governor could argue that the elimination of the corporate income tax would recoup most of that money back to the large refineries.
Should the economy grow as the governor (and most recently Friday’s Forbes Magazine) predicted after an income tax phase out, the added $500 million could be used as a transition fund, unneeded in seven years as extra revenue came from the increased sales taxes of a newly prosperous populace and in-migrating professionals.
The excess revenues could pay for a substantial EITC to cushion the blow to the working poor seeing as much as a $359 per year state tax hike, or it could woo Democratic Senate and House members seeking to plug that $1.2 billion deficit, and not further eviscerate mental health, hospital, and higher education programs in the process.
It could be a ‘goodwill’ bribe from the governor to the legislature to get his tax swap passed. Because, despite Jindal’s sway in Baton Rouge, more than a third of both legislative chambers are still controlled by Democrats, and it takes a 2/3 majority to pass any tax. He cannot do it with Republicans alone.
A temporary oil processing tax might cushion the blow. Jindal pledged previously to oppose such a measure, but he also vetoed a tobacco tax, and now wants as much as a dollar boost per pack. Under the banner of revenue neutrality, it may be time to embrace another Democratic idea for the Governor to achieve his very GOP goal of making Louisiana the tenth income tax free state.
This article was originally published in the January 28, 2013 print edition of The Louisiana Weekly newspaper