While I would prefer that Governor Jindal would drastically cut the size of state government (truth be told, I think all levels of government should be drastically cut), I’ve been intrigued by his plan to eliminate the state income tax and replace it with an increased state sales tax.
However, every day it seems that you’re hearing from someone else making headlines by criticizing Governor Jindal’s tax swap plan. Whether it’s a Legislator, former Governors Blanco and Edwards, or250 members of theClergy, they all say the same thing: the tax swap idea will unfairly impact the poor.
They’re calling the plan “Regressive”.
But, guess what? They’re wrong.
While I don’t want to disagree with two former Democratic Governors and 250 Clergy members, they’re using flawed math and faulty logic to make their point. And, truthfully, I don’t know what former Governor Kathleen Babineaux Blanco’s point was. Sorry KBB, don’t think that “the whole state is going into meltdown” either and, after the “meltdown” you had after Hurricane Katrina, I don’t know how you can say that word with a straight face.
Now, before we get too far ahead of ourselves, let me preface this column by stating that I am not an Economics Professor or an Accountant.
That being said, simple economics would tell you that, if you eliminate the state income tax, you would have more money in your pocket to spend, save or invest as you wish. How can that be “regressive”?
$22.56 or $1,200: It’s Your Choice
Currently, an individual earning between $12,501 – 50,000 annually, is subject to a 4% state income tax, before deductions. If you earn $30,000 per year, that’s equal to $1,200.
Remember that $1,200 number.
If you were to spend that $1,200, the proposed state sales tax increase from 4% to 5.88% would cost you a whopping $22.56.
So, would you rather have $1,200 in your pocket and have it cost you $22.56 if you spent it, or let the state keep taking money out of your pocket each paycheck?
But, the $22.56 tax cost doesn’t begin to tell the whole story or the tax swap’s impact on low-income individuals and families.
The fact of the matter is, low-income people have less disposable income than higher-income households. Seems logical right?
Low-income households spend a higher percentage of their income on “basic needs” (housing, automobile cost and usage, groceries). In fact, it’s estimated that low-income households spend 80 – 90% on “basic needs”. That leaves 10 – 20% of their remaining income as “disposable.”
Since the “basic needs” of housing, automobile cost and usage, and groceries, aren’t subject to sales tax, and won’t be subject to sales tax under Governor Jindal’s plan, the impact of the tax swap is further minimized for low-income households.
Going back to our $30,000 example, if that household has 20% left over after their “basic needs”, they would have $6,000 in available disposable income.
If they spent that entire $6,000 in disposable income, the state sales tax increase proposed by Governor Jindal would cost the household an additional $112.80.
Again, would you rather have $1,200 in your pocket and have it cost you $112.80, or let the state keep taking money out of your pocket each paycheck?
But, Higher-Income Households Pay Less Taxes, Right?
How you answer that question may likely determine whether you are a Democrat or a Republican.
While it may be true that higher-income households may pay a lower percentage of the tax increase, that fact is offset by their corresponding higher percentage of disposable income.
Higher-income households typically spend 40 – 60% of their income on “basic needs” compared to the 80-90% that we mentioned above for lower-income “basic needs” spending.
Thus, if a household earns $100,000 per year, that would leave $40,000 – 60,000 available as “disposable” income.
If that entire amount were to be spent within Louisiana, that would yield $752 – 1,128 in new sales tax revenue due to the proposed increase.
In terms of real dollars, even at the low end, the new sales tax revenue produced by a higher-income household is over 6 times what a low-income household would yield.
Even if that figure were to be cut in half to account for savings, it would still dwarf the impact on low-income households, and higher-income households would have an additional $6,000 from the elimination of the personal income tax (currently 6% on everything over $50,000) in their pockets to spend, save or invest their money.
Since higher-income households open businesses and hire employees, the impact of eliminating the state personal income tax along with the corporate and franchise taxes, should lead to increased employment and, potentially, increased wages – a win-win for low- and moderate-income households.
The elimination of the corporate and franchise taxes will also make Louisiana more competitive economically with other states, which should lead to even more jobs.
Did You Say Loopholes And Tax Exemptions?
Now, admittedly, the Governor is proposing to install sales tax on a host of services not previously taxed. I agree that loopholes and tax exemptions should be closed. It is not fair to anyone if some industries get tax breaks while others do not.
We’ll have more on the tax loopholes and exemptions as they become detailed. Trust me, all of the special interest groups attached to services that will now be taxed under Governor Jindal’s plan are just starting to make noise. Just wait until the legislative session actually starts.
The Tourist “Trap”
Since a large portion of Louisiana, particularly New Orleans and South Louisiana, relies on the tourism and hospitality industries to drive their economies, many have questioned the impact of Governor Jindal’s plan on tourism.
Don’t believe the hype here either.
When you sit down with your family to discuss where you are going on vacation have you ever said, “Honey, I don’t think we should take the kids to Disney World this year. The sales tax is just too high.”
No? Me neither.
When you book your hotel room, in most cases, you don’t even know the amount of taxes you’re paying until you check out – and then it’s too late.
The amount of local sales taxes, even Hotel/Motel taxes, is rarely, if ever, a consideration for a vacationer or a business traveler attending a convention.
According to a survey by the Global Travelers Association, New Orleans isn’t even in the Top 10 list of cities with the highest daily taxes for travelers. Even including Governor Jindal’s proposed state sales tax increase, New Orleans still won’t crack the Top 10.
In fact, New Orleans won’t even be at the same level as that tourist mecca down I-10 called Houston or other tourism hot spots like Cleveland, Minneapolis and Kansas City.
Let’s see: should we go to New Orleans for Mardi Gras or visit Minneapolis this year?
And, don’t even put New Orleans in the same category as the Top 3 most taxing cities for tourists in the USA: Chicago, New York City and Boston.
No, the state sales tax increase will have ZERO effect on tourism, business travel and conventions.
Regressive? I Resemble That Remark
Again, I’m not an Economics Professor or an Accountant. However, on an individual basis, if you call keeping more of your money in your hands to do as you wish with it, instead of handing it over to the government in every paycheck, “regressive” – then slap my face and call me “regressive” too.