Republican Louisiana Governor Bobby Jindal has made the most provocative tax reform recommendation in many years. Jindal said he was going to overhaul the tax law. If he has his way, he will revolutionize it.
The governor proposes to eliminate both the personal and corporate income tax in Louisiana. Why eliminate all the income taxes in the state? Jindal thinks it would be a boon to the economy. By allowing citizens to keep more money in their pockets, they will invest and spend wisely (certainly wiser than the government). Jindal also believes it will attract business. Businesses, too, would like to keep more money in their pockets. The Tax Foundation predicts that repealing the income taxes will propel Louisiana to number 4 on its business climate index, up from a decidedly mediocre 32.
The cost of carrying out such radical reform? The state sales tax will go up from 4 percent to over 7 percent. While the regressiveness of such a move is troubling, several states have sales tax rates at or over 7 percent. Most also tax income. The governor is not only going to have to raise the rate, but broaden the base. We all know that base broadening, particularly with respect to services, is difficult.
The state personal income tax raises about $2.5 billion; the corporate income tax raises another $200 million. Those are not insignificant amounts. The increased sales tax rate, according to the governor's critics, will not cover the lost income tax revenue. Perhaps that is 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 okay. The Institute on Taxation and Economic Policy shows that the reform will be regressive. And it will be, because consumption taxes are more regressive than income taxes. But that is only looking at 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 is not about helping the poor. It is about soaking the rich. There is 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, etc. – will fight any expansion of the tax base to their work. That is silly as they will benefit much more from an income tax repeal. But I suspect the professional classes will support repeal and the continuation of sales tax exemptions for services. Tax lawyers and accountants of course will not like 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 such challenges.
No state in modern times has repealed its personal income tax. Only Ohio repealed its corporate income tax (replacing it with a repulsive gross receipts tax). This is a tremendous opportunity to do something bold. Governor Jindal should be applauded.
Tax Analysts Blog
Jindal's Bold Move
Posted on Jan 23, 2013