SADOW: Jindal’s Tax Swap Has To Shrink Government And Expand Responsibility

As discussion continues about Gov. Bobby Jindal’s tax swap efforts to eliminate income (and, for corporations, franchise) taxes, the correct policy will emerge only if there is proper understanding of the purposes of government and how to achieve them – something already policy-makers and commentators are missing.

As is evolving, the plan envisions tax neutrality requiring striking a short-term balance needing increases in other taxes. Discussed to accomplish this are an increase in excise taxes, in sales taxes, and in the reach of sales taxes, such as by adding some services subject to it and in making greater efforts to collect it from more difficult channels to enforce such as Internet sales. Even sketched in general terms, the swap’s desirability is obvious.

Some have cautioned about a heavier reliance on sales and use taxation – but outside of the proper context. One is Louisiana’s Public Affairs Research Council, which quickly put together a group to provide a rough analysis of the general information and produced a generally valuable and helpful brief on the matter.

But its failure to take context into account – that is, the objective conditions of public spending policy as it currently exists – creates confusion, if not outright contradiction, in its statement. Its very first “guiding principle” of reform states “The goal of state tax policy should be to provide sources of revenue to support efficiently financed and well run government operations, services and infrastructure that are necessary or essential for the public” (emphasis added). Yet later it worries that because “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,” then “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.”

Note the implicit assumption made here – that the current level of expenditures reflects government operations runs well and necessary or essential for the public. In fact, the actual numbers cast much doubt on this contention, as the state ranks 14th from the top among states overall in total per capita expenditures (20th from state general fund sources) yet in terms of overall per capita taxation ranks about 14th from the bottom (when adding in local taxes, as Louisiana is relatively low-tax at the local level, it falls to overall 43rd). This skew suggests inefficiency and/or funding of activities not actually genuinely needed on the basis of necessity or essentiality.

Thus, the PAR report fails to look at the entire equation – if you are to advocate for an appropriately sized state government on which to base tax revenue policy, first you must determine what that appropriate size is. And by all indications, even after years of a small amount of aggregate reduction, Louisiana government still is not right-sized. This failure then makes the exercise of estimating the amount to offset much less useful without the proper baseline, and leads to overcompensating. Further, the goal in mind should not be to base these decisions on what is the potential fastest growing (in revenue terms) single methods of taxation, as PAR suggests, but what is the best combination of methods to encourage overall economic growth to improve all lives as well as to increase government coffers.

PAR’s panel is not alone in its confusion – in a recent column, commentator John Maginnis points out that the tax reform effort will compete with dealing with a forecast budget deficit largely brought on by higher spending yet never connects the two, as well as questioned whether the swap would produce a stable revenue stream when in fact sales taxes are much more stable that income taxes, which vary the most of all sources save certain excise taxes. To date, Jindal Administration officials responsible for plan specifics have avoided, for political reasons, perhaps the most salutary measures that could go into it.

Politically speaking, they have wanted to reduce as much as possible any additional burden the system may produce on lower-income residents, probably in the hopes of increasing the chances of the two-thirds vote necessary to raise some taxes in the Legislature and to avoid the constitutional amendment route required to knock off sales tax exemptions. Yet in doing so, they sacrifice an extremely beneficial aspect to all of this: redressing the horrible imbalance that exists where a substantial segment of the population pays next to nothing into a system that brings them great pecuniary benefits, while the remainder of the population pays almost entirely for that system where they receive few if any of those kinds of benefits. In short, society as a whole suffers when a significant proportion of the population has no clue as to the consequences of policy choices, and a revenue-gathering system that deliberately insulates that segment from them as does Louisiana invites this degradation.

In fact, if we correctly identify as the central public policy problem the truism that Louisiana has a spending problem, then solving for that becomes much easier when that segment of the population that pays little but benefits greatly from that excess spending, either because it more appropriately contributes in the aggregate to the financing of that activity or because as it pays more it becomes more sensitized to the problem, less accepting of it, and more desirous to change it, is asked to contribute more. This transformation produces greater fairness and better policy outcomes, if right-sized and efficient government are desired goals.

Naturally, political considerations to some degree play a role here given the required supermajorities, concerned that if the tax burden on the poorer, despite the vast state largesse expended upon them, rises too much objections to that will scuttle the effort. Yet if that worries the architects of the plan, perhaps they should reconsider the rejection of levying a state property tax to what is the nation’s fourth-lowest collection as a percentage of total state and local revenues and third-lowest as percentage of median home value in exchange for what would become the nation’s highest sales tax rate.

The Constitution allows a rate of up to 5.75 mills, and applying the present $75,000 homestead exemption – that according to 2011 figures wipes out 42 percent of all homesteads right off the bat and reduces costs for the remainder – it still would generate only $195 million a year in revenues for the state. That would take some pressure off raising and/or expanding sales taxes so much, put into play the most predictable of all revenue streams, and cause no tax increase for poorer homeowners and marginal if any increases passed along by landlords or businesses (as they would enjoy income tax cuts to offset). Yet this option is being rejected even though it would be no more difficult to enact than increases in sales taxes.

Perhaps it’s the fear that the extra burden would be felt almost exclusively by the middle class and above, cooling their enthusiasm for the change. The owner of a $100,000 homestead would see an increase of $143.75 yearly, and at double that of $718.75. Still, if the owner of the later has a family income of $50,000, typical state income tax savings would be more than double that level. And it would provide more justification for officials to claim the swap doesn’t burden lower-income families by keeping the sale tax rate lowered or expanded to fewer things.

No doubt better fidelity of a mission to increase commitment and awareness of all parts of the citizenry to their responsibility to make good and of the consequences of policy-making could be achieved by tax reform tactics such as lowering the homestead exemption with imposition of a state property tax and getting rid of sales tax exemptions and not having to raise the sales tax rate perhaps at all, but these require constitutional amendments. More politically achievable solutions remain, yet whatever they may be they must be part of a larger whole that fulfills this mission and understands that the ultimate end of reform must be not one that maintains current levels of spending, but one that promotes efficiency and priority-setting at the right and optimal level of necessarily lower spending.

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