Income taxes hurt economic growth. But will the legislature agree to increase the sales tax?
If Bobby Jindal has his way, Louisiana’s personal and corporate income taxes are headed for extinction.
Jindal wants the tax reform to be “revenue neutral,” and he’s exploring by how much he would have to increase the sales tax (currently 4 percent) in order to achieve that. He’s also meeting with state legislators. Louisiana’s session doesn’t start until April 8, and Jindal’s office intends by then to release a detailed plan, filling in the broad outlines that have been put forward so far.
“Eliminating personal income taxes will put more money back into the pockets of Louisiana families,” Jindal said in a statement earlier this month, “and will change a complex tax code into a more simple system that will make Louisiana more attractive to companies who want to invest here and create jobs.”
The driving idea behind the proposal is to increase growth in the state’s economy. A Tax Foundation analysis cited by the Louisiana Department of Revenue found that “the consensus among experts is that taxes on corporate and personal income are particularly harmful to economic growth, with consumption and property taxes less so.” A 2007 study from the Tax Policy Center was also cited:
The most complete model, developed by David Altig and colleagues, shows the effects of moving from the current system to a flat-rate consumption tax. Their analysis of such a reform, which assumes a less generous demogrant than proposed by national retail sales tax advocates, transition relief for existing assets, and no avoidance or evasion of the new tax, finds that the economy would be 0.6 percent larger than otherwise after two years, 1.8 percent larger after ten years, and 3.6 percent larger in the very long run. Plausible allowances for avoidance, evasion, and the incorporation of a more generous demogrant would reduce these already modest estimates.
Modest they ultimately may be, but Scott Drenkard, an economist at the Tax Foundation, believes that Jindal’s proposal to swap corporate and income taxes for a higher sales tax is “in many ways a good trade-off.”
“Economic evidence shows that taxes on corporate income and then personal income are the two most destructive taxes to growth,” says Drenkard. “Replacing them with a broadened-base sales tax at a slightly higher rate I see as a very positive reform effort.”
Income tax, Drenkard explains, can lead to workers’ deciding it’s not worth the effort to work more than a certain number of hours, particular if the code is progressive. In the case of sales tax, “the incentive is actually toward saving,” and “savings and capital accumulation are linked to long-term growth.”
Jindal is also looking at ways to make sure that low-income residents aren’t severely affected by the switch from income tax (which they may not even be paying) to a higher sales tax. His administration is exploring an earned-income tax credit that would apply to the new sales tax.
Lanny Keller, an editorial writer for the Baton Rouge Advocate, says Louisiana politicos remain uncertain about Jindal’s proposal — not surprising, considering how few details he has released. (Most important, his office hasn’t said how much it calculates the sales tax would have to go up to offset the elimination of income taxes.) “There’s so much uncertainty,” Keller says, “about what they’re going to do that people like lobbyists, people who are in the mix, say it’s DOA [dead on arrival] right now in the legislature. It’s complicated, and it hasn’t been explained to people.”
But Keller also warns that Jindal’s political chops shouldn’t be underestimated. “We’ve seen him cram stuff through the legislature that people didn’t think was possible,” Keller remarks, although he adds that the final bill may not be as comprehensive as Jindal would like.
“I suspect he’s probably pushing for sort of an opening bid to get the movement in his direction,” speculates Kirby Goidel, a Louisiana State University professor and senior public-policy fellow of the Reilly Center for Media and Public Affairs. “In Louisiana, the governor has so much power informally that if he really wants to push it hard, you would imagine that he would probably get it. He definitely wants tax reform.”
“I don’t think there’s any question we’ll have significant tax reform out of this session,” Goidel adds. “Whether this is the proposal that comes through is really the question.”
Regardless of the outcome, it’s a daring proposal.
“For somebody who is very much averse to political risk,” observes Keller, “Jindal certainly seems to be acting more like a risk-taker in this.”
— Katrina Trinko is an NRO reporter.