Who’s going to pay?
That’s the quandary Bobby Jindal and his allies in the state Legislature will face as they seek to dramatically reshape the state’s tax code this year.
Jindal said that he wants the Legislature to take the far-reaching step of abolishing personal-income and corporate taxes during the session that begins April 8.
While politically popular in theory, each potential solution to offset the lost revenue – principally, raising sales taxes, ending tax exemptions, or imposing new taxes – causes other problems, tax analysts told The Lens on Friday.
And lawmakers are aware of those problems – and the voters they affect.
“Every exemption has a group behind it,” said state Rep. Joel Robideaux, R-Lafayette, chairman of the House Ways and Means Committee, which will get first crack at the Jindal plan. “If groups lobby hard and the exemptions have to be put back [not ended], we have to raise sales taxes more than anticipated or broaden the base more than anticipated. It’s a trade-off. It won’t be easy.”
The governor wants the new tax system to be “revenue neutral,” meaning it would raise the same amount of money as the current system.
The personal-income and corporate taxes that Jindal wants to eliminate bring in nearly $3 billion per year.
“Making up that hole is a huge problem,” said Jan Moller, director of the Louisiana Budget Project, a Baton Rouge-based group that favors higher taxes on the wealthy. “You run into a math problem.”
Raising the state sales tax is the most obvious answer. Each 1 percent increase would raise about $750 million per year, said James Richardson, a senior economist at Louisiana State University who sits on the state’s Revenue Estimating Conference.
But Louisiana already has the third highest average sales tax rate in the country, at 8.85 percent, according to the Tax Foundation, a non-partisan research group based in Washington, D.C. The 8.85 average consists of the 4 percent state sales tax and another 4.45 percent, on average, tacked on by local governments. New Orleans, for example, has a 9 percent rate by adding 5 percent to the state sales tax.
One option Jindal is discussing would raise the state sales tax by another 3 percentage points, to 7 percent. Adding in the local sales taxes, that proposal would increase the state’s overall average to 11.85 percent, making it the highest in the country. Tennessee’s average rate is currently the highest at 9 percent.
Jindal said his plan would promote investment and create jobs, especially by putting Louisiana on a par with two other no-income-tax states: Florida and Texas. The Tax Foundation said Jindal’s plan would improve Louisiana’s ranking from 32nd in its Business Tax Climate Index to fourth.
But giving Louisiana the highest sales-tax rates in the country would face opposition from many sectors.
“We are concerned about that,” said Bob Israel, president of the Louisiana Automobile Dealers Association. Car sales generate about $300 million per year in sales-tax revenue, or about 10 percent of all sales-tax revenue in Louisiana, said Richardson.
The average new car costs about $27,000 in Louisiana, Israel said. So increasing the state sales tax to 7 percent would cost the car buyer an extra $810.
Tod Chambers, the general manager of the Roosevelt Hotel, who heads New Orleans Hotel and Lodging Association, said higher sales taxes could “make the city less desirable if our overall taxes are higher than the cities we compete with.”
Increasing the state sales tax to 7 percent would raise $2.25 billion per year, leaving Jindal short by $750 million to offset the income and corporate tax loss.
Tim Barfield, executive counsel for the Department of Revenue, told reporters Thursday that the Legislature could eliminate sales tax exemptions to raise more money.* In all, the state tax code has 191 different sales tax exemptions that cost the state about $2.5 billion per year, according to a state report.
But Barfield immediately ruled out trying to lift the sales tax exemptions for groceries, prescription drugs and residential utility bills. That would take about $500 million off the table, according to the state’s figures. Ending those exemptions would require public approval statewide since they are enshrined in the state Constitution.
Barfield said another option would be “broadening” the state sales tax, meaning the government would begin taxing services that aren’t today.
The big revenue sources would come from taxing consumers when they go to the doctor, hire an attorney, pay a real-estate agent or deposit money in the bank, Richardson said. Companies in these industries would fight new taxes, Richardson said.
What about raising tobacco and alcohol taxes, as Barfield has suggested?
The 36-cent per pack tax on cigarettes raises only $110 million per year, said Greg Albrecht, the chief economist for the Louisiana Legislative Fiscal Office. So doubling that would raise only another $110 million.
Taxes on beer and wine raise only $55 million per year, he said.
Another problem: Janet Speyrer, an economist at the University of New Orleans who has studied the tax system, said the Jindal plan would inevitably shift the tax burden from higher-income residents to lower-income people.
The Institute on Taxation and Economic Policy, a non-partisan public interest research and advocacy group based in Washington, D.C., estimated that the Jindal plan would raise taxes on the lowest 80 percent of income earners. That estimate assumes that Jindal would make up the income tax loss only by raising sales taxes.
Jindal spokesman Kyle Plotkin said the governor would include an earned income tax credit, or something similar, that would offset the higher sales taxes the poor would pay. The current credit for the poor costs the state about $45 million a year. So expanding it would require Jindal and the Legislature to raise more money elsewhere.
It would also potentially create another problem.
Expanding the earned income tax credit – which is claimed on your income tax return – in a state without an income tax “would mean complication and complexity,” Richardson said.
*Correction: The original version of this story misstated Tim Barfield’s position with the Department of Revenue. The error has been corrected.