The Public Affairs Research Council (PAR) and a member of the Louisiana Revenue Estimating Conference (REC), in separate news releases, have raised questions that cast serious doubts on the wisdom of Gov. Piyush Jindal’s proposed state tax reforms.
PAR released its Tax Advisory Group’s Tax Policy Guidance that cautioned that the impact of Jindal’s proposed tax changes should be “accurately estimated and firmly understood with fact-based evidence and confidence.” It also said taxes should be broad-based with “low rates and few exemptions.”
It also said the proposed elimination of the state income tax could “destabilize” the state’s revenue base and even set the stage for increased taxes in the future.
Almost simultaneously, LSU E.J. Ourso School of Business economist Jim Richardson, in an interview with Baton Rouge public radio station WRKF, warned that if the state income tax is replaced by a state sales tax increase, exemptions for items like food and prescription drugs would also have to be eliminated to offset the income tax revenue loss.
Richardson is a member of the state Revenue Estimating Conference which meets at least four times per year to adjust revenue forecasts for the state. The legislature is mandated to rely on REC projections in formulating the state general fund budget each year.
In addition to being a member of REC, Richardson was also a member of the PAR Advisory Group which drafted the organization’s Tax Policy Guidance.
Richardson said eliminating personal and corporate income taxes would create a gap of nearly $3.5 billion in state revenue. “If you make it up with purely sales taxes, you’re talking about doubling the rate.
Richardson—and PAR—calls the sales tax proposal a “regressive tax,” meaning a tax in which the burden falls more heavily on low income taxpayers. “That means a larger part of their income will be subject to tax,” he said. He said because a sales tax is flat, meaning everyone pays the same amount, no matter what their income, those with low incomes will end up paying a higher proportion of their income for taxes.
He said that while other states, such as Texas, do not have personal income taxes, Texas homeowners, for example, pay much higher property taxes. He said there is no valid model for eliminating the corporate income tax because “other state governments work differently.”
He also said that while shoppers may not notice an increase sales tax on low price items such as toiletries, an increased sales tax may well place luxury items out of reach for some. “Go buy a new car, a new refrigerator. Go buy something that has relatively high prices attached to it,” he said. Then you’ll notice it”
He said there aren’t many alternatives to a state income tax for raising revenue. “If there were, we would have already done it,” he said.
The PAR report took the potential of increased sales taxes a bit further by pointing out that with higher sales tax rates, Louisiana businesses would be at a competitive disadvantage to sellers in other states and, to an even greater extent, to untaxed online sales—especially for high-cost items.
“After having obtained the highest sales tax rate in the country,” the PAR report said, “Louisiana would be in unchartered territory as far as estimating how much revenue would be produced.”
The report pointed out that Louisiana already is a relatively low-tax state for individuals and cited the Tax Foundation which says that only three other states impose a lower overall tax burden on their citizens.
Louisiana’s property taxes, which provide a key source of revenue for local governments, are among the lowest in the nation, it says. By contrast, the state’s combined state-local sales tax rate is the third highest in the nation.
Corporate taxes, it said, are subject to many exemptions. “Based on profits, and therefore vulnerable to recessions, the corporate income tax provides a widely fluctuating source of state revenue that is hard to predict from year to year.”
The PAR report said that the corporate franchise tax should be eliminated and ways found to replace the annual revenue loss of about $74 million. “The franchise tax is a complicated administrative burden on business and is often difficult to calculate, which leads to time-consuming regulatory problems and litigation. The current tax is a deterrent to capital investments and a disincentive to companies considering a headquarters operation in Louisiana,” it said. “To offset the revenue loss partially, the state could consider a standard capped annual tax for corporations and/or other registered business entities.”
The report, in responding to Jindal’s proposals, said, “The individual income tax tends to grow with the economy and therefore is an important component of Louisiana’s overall balanced and stable tax structure and revenue base.
“A repeal of the individual income tax could create a more attractive perception of the state’s tax climate but such a move runs the risk of destabilizing the state’s revenue base and would likely set the state for increased taxes in the future.”
The report said that eliminating the individual income tax would result in an annual revenue loss of $2.6 billion based on current-year collections. “It should be noted that in future years the state’s annual individual income tax revenue is expected to grow at a higher rate than that of its sales tax revenues,” it said. “Estimates of the amount of money needed to offset an elimination of the income taxes should not be based solely on the revenue experience of past years.
“If higher sales taxes are implemented, the pressure for new exemptions for sales taxes will be intense,” the report said. “Each new or revived exemption will erode the sales tax base upon which the state would have become more independent. The reform policy should therefore include tougher standards for the adoption of sales tax exemptions.”
Echoing Richardson, the PAR report said low-income individuals and families pay little or no state income tax and therefore will be adversely affected with an overall tax increase if higher sales taxes replace the personal income tax. “The state should find ways to lessen the negative impact on people in these categories if the proposal is adopted,” it said.
“There are some categories of people who have an exemption from (state) income taxes and could also be paying higher taxes overall under the proposal,” the PAR report said. “These include public employee retirees, military retirees and those on disability. Also, Social Security retirement benefits are exempt from Louisiana income tax.”
While saying that such exemptions may be debatable as good policy, the report said, the impact on those people nevertheless “should be noted.”