Louisiana Governor Bobby Jindal today announced some details of his long-awaited “tax swap” plan. He proposes to repeal the state’s personal and corporate income taxes in a “revenue-neutral” way—that is, the revenue loss from repealing these taxes would have to be entirely offset by tax hikes in other areas.
We know the Governor’s so-called reform plan would increase the state sales tax rate from 4 to 5.88 percent—which in local-tax-heavy Louisiana means the average combined state and local sales tax rate statewide would shoot up from about 8.75 percent to a whopping 10.6 percent.
Since the sales tax rate hike would only pay for about a third of the revenue lost from repealing the income and corporate taxes, Jindal’s plan also relies heavily on expanding the state sales tax base to make up the remaining difference. Acccording to the Governor, he’d do it by eliminating close to 200 currently-existing sales tax exemptions. Jindal would also raise the cigarette tax by over $1 per pack.
There’s a lot we still don’t know about the plan (which was the case with his earlier plan, too). Jindal has said he will provide tax relief to seniors and low-income families to offset the impact of these potentially huge sales tax hikes. But how that would be implemented—and, critically, how much it would cost—remains unknown.
Still, the specific details we’ve heard so far are enough to raise several important concerns about the plan’s plausibility—and its impact on tax fairness and sustainability if it is enacted.
Eliminating sales tax exemptions is perhaps the most politically difficult tax reform challenge for state lawmakers – as Minnesota Governor Mark Dayton is the most recent to discover. Sure, every state tax commission for decades has identified expanding the sales tax base, mainly to services that account for more consumer dollars every year, as a way of making the sales tax a more sustainable revenue source for the long haul. But the fact is that the potentially devastating impact of this move on low-income families, coupled with the entrenched opposition of lobbyists for the many industries that would be newly taxed under these proposals, have generally meant that these proposals die a quick death in legislatures.
And even if the Louisiana Legislature could achieve what virtually no other state has ever done—wiping the slate clean by broadly erasing sales tax exemptions from the books—it seems inevitable that the plan as a whole would result in a massive tax shift onto middle- and low-income families—and a giant tax cut for the best-off Louisianans. Unless, that is, Louisiana is prepared to enact a low-income tax credit, one so generous it would dwarf anything offered by other states. But it appears that Governor Jindal's plan would only provide a tax rebate only to families earning less than $20,000, which does nothing to offset the sales tax increases facing a large group of middle-income Louisianans.
In recent months, Jindal has also made it clear that his motivation for this tax plan is to be more “competitive” and more like Texas and other “low tax” states. (Never mind that Texas is a high tax state for its poorest residents.) Jindal has bought into a talking point crafted by Arthur Laffer (and disseminated by groups like ALEC and the Tax Foundation) about job growth resulting from low taxes. But Laffer’s argument is a house of cards, entirely unsupported by the evidence, as ITEP has shown. Early news reports of Jindal’s plan are that anti-tax groups love it and it boosts his odds of getting the Republican presidential nomination. But unless a tax plan is well received by ordinary constituents and boosts the state’s odds of economic success, it isn’t worthy of the word “reform.”