The Gov. Bobby Jindal Administration was back in front of the most important legislative committee yesterday to the fate of the passage of its tax swap plan, energized by a new study that demonstrates the utility of the idea. But as the clock continues to tick to the start of the session, some major modifications may be in order despite the affirmation of the plan’s desirability.
The proposal features increasing sales taxes for existing businesses that must pay it by 1.88 percent, adding new businesses in the service sector paying 5.88 percent, eliminating half of mineral resources exemptions, increasing the cigarette tax, and eliminating all income taxes. The House Ways and Means Committee heard about how the plan would shift more taxation to business by an increase in the sales tax, theoretically by having to absorb some of it, and also would be hurt by depressed demand by passing some to taxpayers. However, with no income taxes paid by either businesses or consumers, individuals should pay an overall lower rate and the overall tax blow on businesses would be softened. In addition, individuals not now paying income taxes would receive rebates to make up for increased sales taxes presumably paid.
In short, the plan is designed to increase the overall burden on businesses, but individuals including business owners would have reduced tax burdens, while only mineral extractors and smokers definitely would see higher taxes. The benefit is this would create a more efficient fiscal structure that does a better job of collecting taxes and spurs economic growth better than the current system – in theory. That conclusion was verified by the report put out by Louisiana’s Pelican Institute of Public Policy and the Beacon Hill Institute of Suffolk University.
However, in practice the Jindal Administration, which has yet to release all details of the plan, faces a major implementation problem, which the reported hinted at. The report concluded that the plan would be revenue neutral for two sample points in time, 2014 and 2017, but has the salutary effect of creating by the later date almost 12,000 jobs and raising typical household incomes by nearly $1,000 over the baseline without the swap.
Yet in these calculations, the report made a pair of assumptions that may or may not get borne out by reality, and perhaps left out another. For inputs to the model used, it assumed 27 commercial sectors would lose exemption and for the first time face sales taxation, until revenue neutrality was attained. Whether these match the 36 currently floated by the Jindal Administration in its working version of the bill remains to be seen.
The report also made no mention of the rebate strategy, where a number of groups of individuals that enjoy income taxation exemption in whole or part would file to get money back to offset any additional sales tax – at present, the working version puts about three dozen different credits in there, such as for low-income earners, state retirees, Social Security recipients, and active-duty military and retirees. Altogether, they are estimated to cost $161 million for which the model does not account.
It also apparently did not include another notion floated in the swap, an attempt to capture Internet taxation. Currently, the state does this only poorly, asking residents to fill out voluntarily the amount not paid in sales taxes from catalog or Internet purchases where it was not captured by the merchant. Many sellers do, but of those that don’t, few residents follow through.
The solution offered appears to be a safe harbor figure that estimates what sales taxes would be paid if the actual isn’t reported – tied to income; ironically, almost a form of income taxation. Again, this was not included in the report, which would take care of the rebates to some extent. But notice the pattern here.
While individuals no longer would have to go through the paperwork and bureaucracy of dealing with income taxes, a new set of papers and bureaucracy to match would be created for many, to track these rebates and catalog/Internet sales. Add to that more businesses, now for the first time collecting sales taxes, would have to initiate paperwork, and compliance costs in terms of time and money may not be that much smaller under the swap. And include those filing rebate paperwork, where although many can do it through existing programs which they access already, it’s estimated a quarter of a million more would have to do so independently.
So while the report shows there are long-run economic benefits, they may be less than anticipated if having to tax more items to fund the rebates. It also seems that compliance savings, not estimated in the report although no doubt part of the economic growth benefit from the system, also may not be as great as anticipated.
Which leads to the thought that perhaps the plan should be altered. Maybe some portion of the individual income tax should remain, say a flat two percent for everybody, which (according to the most recent figures) would lower income tax take by about $1 billion; keep in mind that the new areas of sales taxation is estimated to raise about $1.4 billion. When adding in the extra cigarette and less exempted mineral taxes, all that may need to be done is broadening the sales tax base without raising the rate. And then to counter complaints that incrementally higher sales taxes (on the new services) would be paid by the poor and pensioners, increasing the state earned income tax credit or including a rebate section on the individual return, bumping up the state income tax shield on Social Security, and having a rebate section on the form for state retirees and anybody else eligible, and these would take care of all of those now partially or totally exempted from paying state income tax on that kind of income.
As the study shows, there’s no doubt the plan’s theory will work to produce revenue neutrality and increase societal wealth, regardless of its lack of incorporation of the rebates and Internet sales tax collection. But the reporting complexities and uncertainties by introducing new payers of sales taxes, new payers of Internet sales taxes, and in requiring a different set of reporting for many, the political demands may make the legislative supermajorities necessary to pass it too difficult to achieve. Thus, at the sacrifice of some economic benefits, discretion may be the better part of valor if the Jindal Administration does not swap quite so much income taxation for sales taxation.
Or to put it another way, a little more attention to tax simplification in terms both understanding its changes and in its reporting for individuals might push the whole effort across the legislative goal line. Despite the desirability of the elimination of the least stable revenue stream to government, income taxation, the Jindal Administration needs to be open to retaining some of it.