Most states are facing budget deficits which demand immediate solutions. Governor Bobby Jindal of Louisiana has proposed a major change which would eliminate the state income tax and raise the state’s sales tax by up to three percent.1 One news source reported, “The governor’s office has not yet confirmed or denied an article in The Monroe News-Star that reports eliminating the state income tax could require increasing the state sales tax from 4 percent to 7 percent.”2
The Tax Policy Center reported that “Louisiana’s current 8.86 percent average combined state and local sales tax rate (4 percent state rate and 4.86 percent average local rate) is already the third highest in the nation. Jindal’s plan would boost it to the highest level in the country by far.”3
The key point is while the exact amount of the increase in sales tax in not yet known, analysts agree that it would be significant.
Those In Favor
The governor promoted his plan in the following way, “’The bottom line is that for too long, Louisiana’s workers and small businesses have suffered from having a state tax structure that is too complex and that holds back economic prosperity,’ Jindal said in a statement released by his office. ‘It’s time to change that so people can keep more of their own money and foster an environment where businesses want to invest and create good-paying jobs.’ Jindal said the plan would be revenue-neutral and that the goal would be to keep sales taxes ‘as low and flat as possible.’”2
Patrick Gleason, director of state affairs for the advocacy group Americans for Tax Reform said in an email, “No income tax states outperform high income tax states in economic growth, job growth, population growth and even revenue growth. Gov. Jindal’s proposal would greatly improve his state’s business tax climate.”4
The flaw with “flat tax” initiatives is that they do not impact all economic groups equally. As the Tax Policy Center stated,” the proposal would dramatically shift more of the burden of Louisiana’s taxes onto lower-income individuals. Since low-income households devote a higher share of their income to consumption, they end up paying higher effective tax rates than higher-income households which tend to spend less and save more. This concern is particularly stark in Louisiana, which was recently ranked as the sixth most unequal state in the country by one measure of inequality.”3
In other words, lower income groups spend a much higher percent of their take-home pay (gross income minus taxes) on basic living expenses than do higher income groups. A sales tax is a “flat tax” which hits poorer individuals harder because they have little or no opportunity to scale back spending on non-essential items because they can buy much fewer in the first place. Simply stated, they’re stuck paying more just to live on an income that is already tight.
Exposing the Inequality of the Tax Proposal
The Institute on Taxation and Economic Policy confirms the flat tax inequality exists even when it is combined with the elimination of the state income tax. It found that “The poorest 20 percent of taxpayers, those with an average income of $12,000, would see an average tax increase of $395, or 3.4 percent of their income, if no low income tax relief mechanism is offered. The middle 20 percent, those with an average income of $43,000, would see an average tax increase of $534, or 1.2 percent of their income. The largest beneficiaries of the tax proposal would be the top 1 percent—a group with an average income of well over $1 million. Louisianans in the top 1 percent would see an average tax cut of $25,423, or 2.3 percent of their income under the plan described above.”5 (All of their statements came from a graph which showed the net effect of higher sales tax and elimination of the state income tax.)
CONCLUSION: Thumbs Down
While the governor’s proposal may end up being revenue neutral as he predicted, it is still unfair. Its premise is that with the state government collecting the same total revenue but from different sources, it will encourage more business development within Louisiana. Based on other states’ experience, that should happen, but its benefit to the state is not guaranteed.
However, what is guaranteed is that the lower income groups will end up paying more just to live at their current (and in many cases, inadequate) level. They will be expected to accept that burden with the possibility that more jobs will be available (but at what incomes?). It’s promoting the classic “trickle-down effect” which we have seen fail so graphically with the recent bank bail-outs. The little guy pays for someone in a better economic state to become fatter.
Proposals like Gov. Jindal’s will hinder the battle against the Democrats and their push for intrinsic evils because it strengthens their charge that the Republican Party doesn’t care about the average tax payer. That “Jindal is not the only Republican lawmaker looking to shift more taxes onto his low-income constituents”5 makes it worse.
The “bottom-up” approach would be to raise the state’s sales tax modestly, but eliminate the income tax for some lower income brackets or spread the cuts over a wider range of incomes. The income tax eliminations or decreases would be based on the same “revenue neutral” philosophy.
By ensuring that the little guy has more disposable income, spending would increase and saving might also. Either or both eventuality would lead to increased business investment with at least the same certainty as the “trickle-down” would. Even if it didn’t happen, the lower income groups would still be better off, which is a good way to improve public morale. Historically, this has been shown to be an effective means of stimulating the economy, which means votes. It also increases the state’s revenue which is what started this debate in the first place.
1 – Dennis Cauchon, USA Today as reported in the Cincinnati Enquirer, 1/15/2013
2 — Jeff Adelson, NOLA.com | The Times-Picayune on January 10, 2013 at 1:19 PM, updated January 10, 2013 at 7:32 PM
3 – Keven Zieber, Media Matters for America blog, 1/14/2013
4 – Michael Bastasch, www.dailycaller.com, 1/15/2013
5 – Pat Garofalo, www.thinkprogress.org, 1/15/2013