Louisiana Gov. Bobby Jindal (R) has made the most provocative tax reform recommendation in many years. Jindal said he would overhaul the tax law. If he has his way, he'll revolutionize it. The governor proposes to eliminate both the personal and corporate income laws in Louisiana. Why eliminate all the income taxes in the state? Jindal thinks it would be a boon to the economy. If the state allows citizens to keep more money in their pockets, they will invest and spend wisely (certainly more wisely than the government). Jindal also believes the change will attract businesses. Businesses, too, would like to keep more money in their pockets. The Tax Foundation predicts that repealing the income taxes would propel Louisiana to No. 4 on its business climate index, up from a decidedly mediocre No. 32.
The cost of carrying out that radical reform? The state sales tax would rise from 4 percent to more than 7 percent. Although the regressivity of that move is troubling, several states have sales tax rates at or more than 7 percent. Most also tax income. The governor will have to not only raise the sales tax rate, but broaden the base. We all know that base broadening, particularly for services, is difficult.
The state personal income tax raises about $2.5 billion annually; the corporate income tax, another $200 million. Those aren't insignificant amounts. The increased sales tax rate, according to the governor's critics, wouldn't cover the lost income tax revenue. Perhaps that's not such a bad thing. Personally, I think the governor should vow to cut government by the amount the increased sales tax does not cover.
Liberals hate this proposal. Some say it will "ruin" Louisiana. But the nine states without broad-based income taxes seem to do OK. The Institute on Taxation and Economic Policy shows that the reform would be regressive. And it would, because consumption taxes are more regressive than income taxes. But that's looking at only one side of the equation. If repeal of the income tax results in an economic boom, everyone will benefit. Wages will increase. And there will be more economic opportunities for those on the lower end of the income ladder. The rich already have those opportunities. The government should be expanding opportunities for everyone else.
What really galls liberals about Jindal is his audacity to cut tax burdens on the rich. You see, for many on the left, this isn't about helping the poor. It's about soaking the rich. There's a long populist tradition of attacking the well-to-do. Public policy fueled by jealousy never amounts to much in terms of improving people's lives.
But Jindal's biggest obstacles are unlikely to come from liberal talking heads. Professional service providers -- lawyers, accountants, and so on -- will fight any expansion of the tax base to their work. That's silly because they'd benefit much more from income tax repeal than they'd be hurt by a tax on services. But I suspect the professional classes will support income tax repeal and the continuation of sales tax exemptions for services. Tax lawyers and accountants, of course, won't like the repeal of income taxes because, well, income tax complexity is the gift that keeps on giving. Those are common political problems when facing reform. The governor will have to figure out how to overcome those challenges.
No state in modern times has repealed its personal income tax. Only Ohio has repealed its corporate income tax (replacing it with a repulsive gross receipts tax). This is a tremendous opportunity to do something bold. Jindal should be praised.
Heineman's (Sort of) Bold Move
Nebraska Gov. Dave Heineman (R) sounded like he was shaking things up when he gave his State of the State speech. Like Jindal, he called for elimination of the personal and corporate income taxes. But I'm unsure how committed to boldness the Nebraska governor is.
After his speech, Heineman offered two proposals. The first would repeal the personal and corporate income taxes and pay for it through the elimination of $2.4 billion in sales tax exemptions. That's pretty bold, although many people will be justifiably skeptical about eliminating so many exemptions. It's hard to imagine income tax repeal without sales tax rate increases.
But perhaps realizing the difficulties of achieving reform, Heineman also submitted a second, much less ambitious plan. Plan B calls for ending the corporate income tax and greatly reducing income taxes on retirees. He would pay for that by eliminating $395 million in sales exemptions. Obviously, finding $395 million in sales tax exemptions worth eliminating is easier than finding $2.4 billion.
But the governor should be praised for his efforts to rid the state of the corporate income tax, which remains the worst way to raise revenue.
Not the Case in Massachusetts
Massachusetts Gov. Deval Patrick (D) is taking a different approach. He's calling for raising the top personal income tax rates, lowering the sales tax rate, raising gasoline taxes, and raising corporate income taxes. Patrick's goals are to make the system fairer and to raise more money.
He wants to raise the top personal income tax rate from 5.5 percent to 6.5 percent in the name of fairness. Wouldn't raising it to 7.5 percent be even fairer? Or 8.5? 10.5? Besides the philosophical question of what's fair, the danger is that neighboring states aren't looking to increase tax burdens. The risk for Massachusetts is that it will recede to an earlier time when high-income people and jobs chose to move out of state. The moniker Taxachusetts is hardly an advertisement for economic development -- unless you're in New Hampshire.
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The Politics of State Taxation is written by State Tax Notes contributing editor David Brunori, who welcomes comments at email@example.com.
David Brunori is also a blogger for Tax Analysts. Read his related blog here: http://www.taxanalysts.com/taxcom/taxblog.nsf/Permalink/UBEN-945SJ7?OpenDocument
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