Tax Analysts Blog

The Problems with Jindal's Tax Reform Plan

Posted on Apr 17, 2013

Louisiana Gov. Bobby Jindal has backed away from his plan to repeal the state’s individual and corporate income taxes and replace revenues through an expansion of the sales tax. Gov. Jindal has assured supporters that he is not abandoning the plan, but has asked the Legislature to come up with a way of making the plan work.

The real “problem” with the plan is that it would broaden the sales tax base and increase the sales tax rate. Base broadening is not usually a problem because it is generally considered a good thing in the tax policy world. Lower rates and broader bases are lynchpins of good tax policy.

But neither consumers nor businesses liked Jindal’s plan. Here’s why: To start, Jindal needed to raise the sales tax rate. So the plan would not only increase the number of goods and services subject to tax, but would also increase the rate at which they were taxed. So for the state’s poorest residents, who were paying little to nothing in income tax, that’s a direct tax increase.

Another issue is that the method by which the tax base would be expanded results in a significant amount of tax pyramiding. Tax pyramiding is the taxing of a good multiple times as it moves through the supply chain. In a world of perfect tax policy, sales tax should be applied once on the consumption of any good or service. That is, tax is imposed on the end user, so business-to-business transactions should be excluded.

When tax pyramiding occurs, the result is higher effective tax rates on certain products. For example, a complex product that is produced by multiple companies would be subject to a higher effective sales tax rate than a product that is produced by a single company. Tax pyramiding distorts economic behavior by creating an incentive for businesses to vertically integrate.

The Jindal plan did not shy away from tax pyramiding. In fact, Tim Barfield, Louisiana Department of Revenue's Executive Counsel told the Louisiana House Ways and Means Committee that the tax burden on businesses would increase under the plan. When pressed to quantify that amount, he said that businesses would be paying 80 percent of the new sales tax on services. That information led some business groups that otherwise have been supportive of Jindal to pull their support of the plan.

I admit, I am not a fan of the income tax at the state level, but it’s hard to get behind a tax “reform” plan that utilizes base broadening to encourage inefficient tax policy. Still, while Louisiana may have avoided the lengthy debate that would have ensued had the governor continued to pursue his plan, the budget for the next fiscal year looks dismal (Gov. Jindal’s budget projects a $1.3 billion shortfall). It is a sign that something has to change and because of that, I sincerely hope thoughts of tax reform are not entirely lost.

Read Comments (2)

Cara Griffith's picturecara griffithApr 17, 2013

Thanks very much for the comment! We at Tax Analysts enjoy the blog because of
the discussion it creates. So please, keep the comments (positive and negative)
coming.

Ralph EllisonApr 18, 2013

Your opinion as to the real problem with Jindal plan is most insightful. The
base broadening to business inputs in particular is terrible tax policy.
Anyway, please keep opining.

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