Tax Analysts Blog

Jindal's Bold Move

Posted on Jan 23, 2013
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.

Read Comments (5)

The VAT BastardJan 22, 2013

Jindal's proposal is generally consistent with the international trend of
diminishing reliance income taxation and increased reliance on consumption
taxation. The primary difference here is that, rather than merely lower income
tax rates or narrow the base, he is repealing the tax altogether. As you say,
bold move.

There is a lot to be said for taxing consumption, but RSTs certainly aren't a
perfect revenue tool. Their major shortcomings include: (1) failure to reach
the service sector, (2) failure to exclude business inputs, and (3) failure to
reach remote venders. These are serious defects that ultimate will require a
fix.

Also, the RST is regressive whereas the income tax is progressive. Even if
Jindal's reform package is revenue neutral, there will be a distributional
shift of the state's tax burden.

No doubt other states are watching Louisiana with great interest. This could be
the start of a new national trend: 'Leave consumption taxation to the states,
leave income taxation to the Feds.'

Jason WegenerJan 24, 2013

The one thing this article fails to address is increasing the amount of revenue
the state collects to the tourism industry. Additionally, with a growing
number of mid-level remote online/technical jobs which can operate anywhere,
Gov. Jindal has a much more attractive package to lure those industries, as
well as manufacturing jobs and home bases for oil-field work, back to
Louisiana. The previous commenter does point out one key compoonent missing --
a method of tracking down and collecting revenue for remote vendors such as
online distributors.

Bayou TigerJan 29, 2013

Just another attempt by the government to enrich the 1% at the expense of the
99%

lucas rachubaJan 31, 2013

@Bayou: methinks the 1% would be better off without the 99% than with it.

Bayou TigerMay 21, 2013

Clearly, Jindal over-reached and thought the public was not paying attention.
Once reputable reports surfaced that included evidence that his program was a
farce and based on air, the legislature too notice and said "nope." I'm still
trying to figure out why anyone ever voted for this guy.

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