The plan
would eliminate all personal and corporate income taxes, plus the corporate
franchise tax (in essence a licensing fee based upon corporate capital that is
perhaps the most unfavorable of all the states that have one), in exchange for
raising the state tax rate 1.88 percent and coverage of that to a host of
previously-exempt services. However, several large exemptions will continue to
exist against the entire state sales tax portion, principally concerning the
acquisition of unprepared food, medicines, and utilities. Plus, any person whose
income falls below $20,000 annually will be able to apply for a rebate of up to
$300, and anyone drawing retirement payments such as Social Security can
get a rebate tied to the first $60,000 of income (currently, recipients and
state and local government retirees do not pay income taxes). Finally, it
raises the tax on tobacco products, by $1.05 per pack of cigarettes.
Evaluated on economic terms,
the plan has much going for it. Over the decades, research results continue to demonstrate
that the most reliable path to increased societal wealth comes through systems
relatively light on income taxes compared to sales taxes (nine states currently
have no income taxes). Empirically, states with the lowest income taxes for
decades have seen the most economic growth, while those with the lowest sales
taxes have seen the least growth.
Of course, the exceptionalities distort this benefit to some degree. The continued constitutional food/drug/utilities exemptions necessarily forces a higher rate which in turn prompts the rebate strategy and higher. At least three major exemptions are left in, but one towers over the other two (which have minor changes limiting them) in terms of money forgone: the wasteful motion picture tax credit. Fortunately, change is proposed for this as well: excluding the credit against any actor salaries over $1 million and disallowing a few other things.
This would have a beneficial
impact on state finances. Currently spewing out in an annual range of roughly
$200 million a year for which the state sees an average return of $30 million,
the salary limitation would discourage big-budgeted efforts, reducing the
amount significantly the state must cough up for little return. The deal also
halves the natural resource extraction exemption.
Yet overall it should
provide a substantial boost to economic development fortunes, which perhaps is
why the Department of Revenue estimates that the typical citizen will pay a
small percentage less in overall state taxes. Although designed to be revenue
neutral, perhaps analysts are factoring the benefits of increased economic
productivity: even though different individuals will experience differential
income savings and consumption payments, the extra output may raise incomes and
thus saved from income tax at a faster rate than proportion of income that goes
to the added sales tax.
But while the economic case
for the swap is strong, it is the evaluation on political terms that may prove
to be its undoing, and that starts with that fact that there will be winners
and losers in the deal in the immediate term. For example, the services to face
new sales taxes will see reduced business, a dropoff that may be greater than
the income tax savings realized by their business, at least in the short run.
One consideration that could
mitigate potential wariness among business would have been introducing as part
of this centralizing
the collection of sales taxes, which just about every state does. Instead,
the Jindal Administration seems to have caved to parish concerns that currently
collect these taxes, so now there are no reduced compliance costs and increased
ones for those to be brought newly under the state sales tax umbrella (local
sales taxes still will not apply to these). Reducing paperwork might have
relieved concerns, especially among small business.
Nor is it just these
parochial interests that watered down the idea that also will try to sabotage
the finished product. Prepare to hear local officials carp about how the
increase makes it more difficult to raise local sales taxes – although this
makes the assumption that government spending desires will outpace current
economic growth, the latter of which across the board ought to increase in rate
as a result of the deal. The key here is that “desires” are not the same as
genuine “needs,” but assuredly many politicians at the local level will
obfuscate on that point as they see this move as a threat reducing their abilities
to acquire more power and privilege.
Other ways to stir the
political pot against the change exist. For example, even though the rebate
offer for low-income persons is substantial – at the maximum income level it
assumes 80 percent of all spending occurs in ways to which the additional sales
tax would apply at present, not even counting the old rate also now applied to
new services so it’s a pretty fair argument that lower income individuals actually
will profit with the rebates – there are those who will ignore the data and
math and rail against the swap in order to fulfill a political agenda. No
sooner had the details emerged than a proclaimed Democrat candidate for
governor in two-and-a-half years, state Rep. John Bel Edwards,
began populist demagoguery against the plan with the claim it would
disproportionately hurt the poor if
not a majority of the state’s people and businesses, despite the evidence
otherwise.
Additional issues cloud the
picture. Left uncertain until the legislation gets introduced are issues such
as how prominently does online sales tax take play, or whether the state’s
Earned Income Tax Credit will continue. Yet clearly one interest disadvantaged
under the plan are smokers, where the majority likely would oppose the whole
thing on that basis alone.
And, there will be those
interests that, because of the elimination of around 200 exemptions and
restructuring of others, that will turn out to be net immediate losers. Even
though over the long haul as a result of increased growth they may do better,
human psychology makes people prone to fixate on the short run, overestimating
those costs and benefits while underestimating those in the long run.
This will be the greatest
challenge the Jindal Administration faces, the multitude of different
rank-orderings of preferences people have in their economic lives, which
threatens to stop this kind of change that requires supermajority support. Some
businessman might be perfectly happy that 199 exemptions are going away, but he
benefits from one in particular also on the chopping block that he feels he
can’t operate without. A single mother might wonder why she just can’t stay
under the old system where she doesn’t have to file anything, except maybe the
federal and state EITC requests if she works, and not pay extra sales tax, to
now having to pay and then file to get that reimbursement.
It’s change that could die from a thousand small cuts, with ideological
opponents who see government primarily as a vehicle for wealth redistribution to
favored interests rather than as an agent to assist people in cultivating and
pursuing talents and tasks that benefit themselves and society itching to whip
into a frenzy a mob wishing to inflict those slashes on the infant in the
cradle. It could have been set up more effectively, and may be altered before
becoming legislation, but in this form it seems to be the hand Jindal wants to
play. For the state’s sake and future, he needs to play it well.
2 comments:
I understand the logic behind the exclusion of the services to be taxed with the exception of legal and financial services.
A useful table would be one detailing the amount of revenue each service tax would produce based on the percentage to be applied.
There is no such word as "exceptionalities" according to the Oxford English Dictionary.
The word to use is simply "exceptions."
Moreover, just because YOU have declared the motion picture tax credit "wasteful", it is?
HUH?
I note that you cite your own previous statements, apparently as evidence and support for this declaration. Powerful persuasion there, Professor. (Do you let your students cite their own prior statements to support their subsequent statements?)
Why can't the Governor give the public, and the legislators, ALL of the details of these proposals now?
Does he not know them? Again, HUH?
Or, more likely, is there another totally, undemocratic cram job coming, as was done last year both with so-called education and retirement reforms (and both of which have been held unconstitutional thus far)?
Why can't the Governor put out these sea-change ideas, complete with all details pro and con, give everyone plenty of time to learn what they are and fully debate them, and then get them enacted, constitutionally, through the power of a great proposal and democratic persuasion, instead of bullying cram-downs we have seen in the past?
You need to address these queries, Professor. They are now being asked everywhere; they are mainstream.
The people are paying attention, and it will change the game.
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