Test drive of anti-swap arguments reveals faulty agenda
It wouldn’t be the first time a news story came off as uninformed because of the reporter’s lack of knowledge. But in reading a piece interviewing state Sen. Eric LaFleur, one gets the sense the ignorance and misstatements in it about Gov. Bobby Jindal’s plan to eliminate income and franchise taxes while raising sales taxes, removing sales tax exemptions, and increasing sin taxes come at least as much from LaFleur as maybe from the scribe – and for a reason.
This isn’t the Democrat’s first rodeo – he’s been around the Legislature, starting in the House, since 2000 – and he now serves on both the Senate’s Finance Committee and therefore on the Senate half of the Joint Legislative Committee on the Budget. Yet in his published comments, both quoted and paraphrased, he comes off as clueless about the particulars of the plan, the impact that it will have, if not about taxation policy in the state.
For one thing, LaFleur asserted that the state portion of the sales tax would double from four to eight percent. But there is not a suggestion anywhere that it would come in that high. The Jindal Administration pledged any increase to go no higher than three percent, and its latest apparent figure is 1.78 percent higher. So, right off the bat LaFleur is misrepresenting the entire idea.
Worse, he doesn’t seem to know the law about how sales taxation of property works. He notes that a hike in the sales tax may send buyers of big tickets items – the story mentions “large appliances and vehicles” – scrambling to other states for these. However, he seems entirely ignorant that, in the case of vehicles, on those domiciled in Louisiana regardless of where their sale was made, upon their registration sales tax where they are garaged must be paid (within 20 days), state sales tax inclusive (although if a state has a reciprocal agreement with Louisiana, up to the entire four percent of the state sales tax can be credited if paid in another state). So, nothing would change (assuming the law is changed to bring up the credit to the new state level) in terms of incentives to buy out of state for any kind of vehicle.
Maybe the buying of major appliances might. Then again, if you have transportation capable of hauling such an item and the time and gas money to drive a long distance to bring back across state lines a $1,000 refrigerator (if you can even get it at a price at or below what you could in Louisiana) to save $17.80, knock yourself out. And for almost any other kind of big-ticket item, by their natures they either have to be bought elsewhere, or their market value is so subjective and/or their price subject to bargaining as to make sales tax a non-issue in choosing where to purchase.
Even though not to pay that Louisiana sales tax violates the law. LaFleur also duns the plan on the basis that it could shift business away from home-grown shops physically present locally to out-of-state entities using the Internet. But that’s a separate issue, as legally residents must pay sales tax on any transaction involving a good taxable in Louisiana by a seller who would if in Louisiana at the time of sale be subject to collecting that tax, of eight percent. Few follow the law in that respect, but that’s an enforcement problem and has nothing to do with the inherent costs and benefits of a sales and use tax.
LaFleur continues to show his fascination with straw men when he argues that this swap in effect has the state “put all of its eggs in one basket.” Then why do seven states do the same by not having state income taxes? Their positive experiences economically seem to indicate this is a meaningless worry, but if you really want to persist with this line, if Louisiana joined them it still would have a relatively diverse revenue-raising structure compared to them, courtesy of outsized returns on a per capita basis in terms of mineral extraction (behind only Alaska and maybe Texas) and gambling (behind only Nevada).
But where LaFleur really goes off the rails is where he claims the “biggest problem” is that a sales tax increase will cause state government to cut funding to local public safety, roads, schools, etc. Huh? How does raising state rates make local governments cut services?
Well, by making a totally off-the-wall assumption on another issue entirely unrelated to the tax swap argument: he fortune tells that state government is going to cut, apparently, revenue sharing (which in most instances would require a constitutional amendment to change) and local projects that legislators enjoy stuffing into budgets out of the operating budget, and maybe reduce capital outlay as well presumably to save on interest costs. Of course, not only does he have no evidence to back up this reading of tea leaves, but it also is another unrelated matter to the merits of the swap that will happen or not independently of any changes made to how the state can provide financing to local government.
His argument would have been far less specious had it just left it at declaring an increased state sales tax might make it less likely for local constituencies to raise sales taxes on themselves if they needed more revenue. Yet this still is an extraordinarily weak argument against the swap, for three reasons.
First, it may be that voters would be more forgiving of a local increase knowing that they pay no income taxes (and that they pay less at retail for goods and services because business taxes, applied to sole proprietorships or corporations, because they no longer have to pass on the cost of income taxation to consumers), and thereby this reluctance is mooted. Second, if local governments want to raise money without direct popular control, they can roll forward property tax rates. If that’s a wise decision where the public wants government to do more stuff, then there won’t be retribution at the ballot box in the future for that.
However, the largest flaw in this thinking is to assume that local government would need more revenue from tax increases in the future. What are local governments not doing now that they should – that is, something that people need that serves a common good and does not compensate for people’s bad choices or does something they could do for themselves with proper desire and effort – which would require additional revenues above and beyond those expected through economic growth? If anything like this exists at all, it certainly is more than compensated for by the myriad of things that government at all levels does which do not serve genuine needs.
And while one could sound the alarm on unfunded mandates such as escalating pension costs passed along, that a large majority of local governments have not restricted their activities to these genuine needs means there is slack to cut first in these areas to meet these things – assuming that the state itself does not intervene with assistance (which in some instances it is required to do). Yet keep in mind the prevailing standard – voters will approve of tax increases if they see the need as genuine – that means governments never will be short on funds so long as the demonstrate to voters adequately the genuine need at hand.
Thus, if the need is genuine, then the public will respond by approving a sales tax increase; if not, they won’t, making irrelevant this argument. Perhaps the real concern of LaFleur and others who buy into it regardless is that at a higher sales tax rate the people will become more choosey about whether they want government to do certain things, and then maybe they’ll not renew some existing local taxes once those come up after a potential state sales tax increase and – horror of horrors! – force smaller government onto the local polity. Note that his objection was framed not in terms of the impact that higher sales taxes would have on people’s behavior, but rather he focused on how it would impact local governments; their health, not the people’s fiscal health, is what concerns him more.
Posted by Jeff Sadow at 09:45