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SADOW: Jindal’s Tax Swap Might Actually Grow The Economy If He Does It Right

SADOW: Jindal’s Tax Swap Might Actually Grow The Economy If He Does It Right
January 13
15:36 2013

During his second, which ended as his first successful, gubernatorial campaign, Gov. Bobby Jindal said he wanted to cut individual income taxes across the board, if not eliminate them entirely eventually. According to Jindal, that day now has arrived with his announcement of a plan involving the elimination of individual and corporate income taxation that, even with self-imposed imperfections to it as a legacy of Louisiana’s populist plague, creates a fairer and more beneficial tax system for all.

Jindal states that simplification of the system will produce more efficiency that will encourage investment from outside the state and more economic development within it by removing these taxes and all the exceptions to them that are disincentives to investing in productive activities. It doesn’t get any simpler than wiping out the state’s progressive income taxes and the 128 exemptions to them which (2011 statistics) comprise more than half of all revenues not collected. Or, another way of thinking about this is that already about half of all income tax revenues are forgone through exemptions; why not just go all the way and let go of the other half?

But Jindal is not counting on the additional economic growth alone to offset loss of state revenues. He also maintains there will be an increase of sales taxes, in a range suggested between 1.6 to 3 percent additional to the state’s combined 4 percent rate. That basic rate is unremarkable – it ranks 38th among the states – but when the local rate gets thrown in, which has the highest weighted average of all the states at 4.85 percent – this makes the current overall aggregate rate the country’s third-highest and it easily would become the highest with the predicted addition.

However, a tremendous amount of exceptions occur to collection of sales taxes. In fact, the 191 of these cost almost as much as the income tax exemptions. And, in one of the few specifics offered, Jindal’s otherwise general plan would keep the biggest exemptions of all intact, including exempting purchase of unprepared food, drugs, and utilities, which are more than half of all of them and lower total state sales tax take by $718 million or more than a quarter in the most recent year with available data. Whether by preference – since this is in the Constitution, statutory changes won’t suffice – in these statutory changes this aspect guarantees the sales tax rate hike, and higher than it otherwise would be.

Further, Jindal would keep the second-largest tax credit in statute, the Earned Income Tax Credit. It’s barely behind in total (about $45 million) the credit claimed if state income taxes are paid by homeowners on their assessments to fund the state-owned property insurer, although both are dwarfed by the constitutional requirement to deduct federal taxes paid from Louisiana income for computational purposes. But, unlike these other two larger ones, this simply is a handout of money to tax filers most of whom have no state income tax liability whatsoever – for its recipients it is, for some mostly as some is a refund and for most entirely, a cash grant.

In addition, Jindal also has ruled out another potential source of income, a state property tax. The Constitution permits such a tax up to 5.75 mills, but it never has been enacted. This would be in addition to local government property taxation – except that, at the parish level (excepting Orleans), there is the $75,000 homestead exemption that leads to the state having the sixth-lowest per capita collection from this source among all states.

At present, all of the major sales tax exemptions, EITC, and homestead exemptions together serve to give the working poor essentially immunity against taxes. As constituted currently, if you are a single individual who makes minimum wage, who spends the bulk of that on unprepared (nonalcoholic drinks included only) food, utilities, and (prescription) drugs, and own a home worth $75,000, in net terms you will pay no state income taxes and in fact many in this situation will get a cash grant because of the EITC. For these people, the Jindal plan means they continue to pay net nothing.

And if you are retired and thereby can’t get the EITC? Well, currently if you live off Social Security benefits or those from a state or local government job that approximate minimum wage levels, you’re not taxed on those at any level – although Jindal has not said whether those two exemptions would continue, necessitating turning them into a kind of EITC. If not, the only increase would be on the portion of nonessential exempted purchases, which would be a pittance on what would be relatively luxury items.

Yet even if you are poor and chose not to work, as has been increasingly the fashion facilitated by policies by the Pres. Barack Obama Administration, you only pay a pittance in Louisiana state and local taxes now as long as you choose not to consume conspicuously – just sales taxes on anything not the basics and a low portion of your rent and perhaps a few hundred dollars a year in property taxes. Also for these people, taxes would barely budge up, and then only on that portion of nonessential items.

In the larger scheme of things, these kinds of exceptions Jindal seems intent on proposing work against his larger theory that simplification brings growth. The most efficient system spreads the tax burden as much and as flatly as possible, which these exceptions subvert. Further, because they reinforce the perverse nature of transfer payments – those who contribute the least to the system gain the most from it – they do the opposite of strengthening the connection that these users feel to the larger, organic society: when people contribute more of their own resources for use in public policy making, they likely are to invest more time and energy into critically appraising the use of those and everybody else’s resources, discouraging through their lobbying of policy-makers the use of those resources to fulfill low priorities, to privilege special interests, and to subsidize inefficient, if not wasteful, individual behavior.

This also takes away the utility inherent in consumption taxes such as sales. By shifting taxation towards the discouragement of consumption and away from taxing income from work production and investments – this promotes investment. So while Jindal by cutting income taxes achieves an incentive to invest and while raising sales taxes a disincentive to consume rather than invest, he would attenuate that impact by these exemptions. Probably getting rid of all sales tax exemptions, combined with the economic growth from the ridding of income taxation, would net out having no income tax revenues (or would allow for a smaller increase in the state sales tax rate). Still, overall this plan accomplishes a desirable shift from consumption to investment.

Perhaps this is the cost levied by the populist political culture, eroding but still with potency in Louisiana. At best, it only slightly gets a few more, exerting a slight amount of extra effort, from the large many that otherwise sit in the wagon to help the relatively few who must work hard to pull them. But it is an improvement, even as there are those who object to broadening the sense of social responsibility that these changes would create.

These opponents already decry the proposal on the basis that taxes on the poorer could go up, because the poor’s income tax relief (if they pay any at all in net terms) may be exceeded by their increased sales taxes paid on essential and nonessential items, yet note that this is largely overblown if not disingenuous. Government largesse in this instance, and is almost entirely maintained in Jindal’s planned changes, should extend only to basic needs: if you want luxuries like televisions or bigger, newer ones; or cellphones or more minutes for them; or to eat out or eat out more often and more of it, and the like, there’s no reason the state shouldn’t increase your penalty for engaging in this kind of consumptive behavior instead of you using those resources to put yourself in a position for a higher-earning job – or in even getting a job in the first place – while you are being encouraged to do so further by eliminating the penalty you suffer by having income or more of it.

And it’s not like Louisiana suffers, relative to its spending habits, with a high per capita sales tax burden at the state level, ranking only 25th among the states. Nor does it have high income tax levels, ranking 36th for individual and 21st for corporate. Not only does this belie the ignorant argument that the state has a revenue problem – it collects quite adequately by these numbers – but also demonstrates that neither is it a “poor” state, a claim often made to justify spending more money in defiance of the plain fact that the state does have a spending problem, as a “poor” state could not squeeze so much from its taxpayers relative to other states.

Nor would it spend more than other states on a per capita basis if it were “poor.” In fact, it is ranked 14th in total expenditures, reaching that as it is 20th when it comes to general fund expenditures but behind only Alaska (with its idiosyncratic revenue sources and spending needs) when it comes to spending federal dollars (as of 2010, with little of this being hurricane recovery in nature). If anything, the populist heritage of Louisiana has created a state superstructure skilled in leveraging state money to acquire federal bucks, but it all adds up to more spending than is necessary or desirable given genuine needs and a commitment to effective and wise use of those funds.

In short, given what he has revealed about it so far as the current details indicate, Jindal’s plan places no additional burden on many of the poor and hardly increases it for the remainder. It may actually improve the aggregate lot of the poor with stimulated economic activity creating additional jobs and wealth, and by enhancing incentives to be productive rather than consumptive. It does not do so by unduly increasing per capita sales tax burdens because, despite the high rate, so much exemption occurs. If any budgetary concerns exist as a result, it is because, even after a decline of state non-capital state-revenue spending from fiscal year 2009 to (forecast) 2013 from $18.4 to $18.2 billion, the state spends too much. As such, while it may not be for certain special interests and to those wedded to the notion of government as wealth confiscator and distributor, for the whole of the state this swap is beneficial on the bases of equity and efficiency.

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1 Comment

  1. Ted Dore'
    Ted Dore' January 15, 01:49

    GREAT PLAN! YEAH BOBBY!

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