Gov. Bobby Jindal finally gave the state legislature (some of) the details of his plan to eliminate individual and corporate income taxes — which account for about $3 billion in annual revenues — without a negative impact to the state budget. As expected, Jindal's plan includes a hike in the state sales tax rate — from 4 percent to 5.88 percent — meaning Louisiana's average combined state and local taxes will be the highest in the country at about 10.75 percent. Jindal also plans to expand the sales tax base to include some services. Healthcare, education, construction, real estate, financial services, legal services, oil and gas services, and funerals will be excluded.
Food, prescription drugs and utilities will also be protected from tax hikes. As Jindal puts it, "We are going to protect food, prescription drugs and utilities from increased sales taxes." Of course, tax rates on those items are all protected by the state Constitution, so raising them (aka amending the Constitution) would ultimately require voters to approve higher tax rates on their own food, utilities and prescription drugs. Which seems unlikely.
I will present the highlights of the plan after the jump, but first I'd like to take a close look at one sentence in Jindal's speech, the statistic that justifies this tax code overhaul. The governor has repeatedly cited huge employment growth in states "without an income tax." He did so again today, in the following sentence:
“Over the last ten years, more than 60 percent of the three million new jobs in American were created by the nine states without an income tax."
This simple, seemingly straightforward declarative sentence is so loaded with half-truths and omissions it's really quite impressive. According to Bureau of Labor Statistics preliminary figures, the country added about 3.7 million jobs (later adjusted to 4.3 million) between January 2003 and December 2012. Of those, sixty percent, or 2.2 million, were, in fact added in nine states that don't have a traditional individual income tax. 1.5 million were created in Texas alone. So that much is true.
Six of those states — Alaska, Florida, New Hampshire, Tennessee, Texas and Washington — levy general business taxes on earnings and/or assets. The state of Texas, the great taxless success story, collected $4.6 billion in corporate franchise taxes in fiscal year 2012. South Dakota has a six percent business income tax that only applies to banks.
Two of them, Tennessee and New Hampshire, levy taxes on individual income, but only investment income. And, to be fair, neither state is getting much out of these taxes. In 2011, New Hampshire collected $77 million in revenue on its five percent dividend tax. Tennessee's six percent Hall Income Tax produced about $184 million in revenue. That's still negligible, but it's actually almost as much as Louisiana's been collecting in exorbitant, job-killing corporate income taxes, after you account for our $1.6 billion in exemptions. (In pure dollars, we have the third most expensive corporate exemptions in the country. Considering the only states that offer higher corporate income tax exemptions are New York and California, Louisiana's $1.6 billion is certainly the highest as a percentage of the state economy and state budget.)
Only two states, Nevada and Wyoming, are as tax pure as Jindal wishes Louisiana to be. And one of them collects $800-$900 million annually in gambling taxes.
(Read Jindal's plan after the jump)
You can read all of it on the state website. But here are some of the important parts of Jindal's presentation:
The plan will ensure revenue neutrality by:
Eliminating~$2.7 Billion in personal income tax and corporate income and franchise tax
Eliminating over 200 exemptions, resulting in $114 Million in additional revenue
Note: Jindal hasn't said which exemptions will be eliminated. So we don't yet know if income tax exemptions that will no longer apply anyway are going to count as having been "eliminated."
Broadening the state sales tax base and raising the state rate to 5.88%, which will result in ~$2.1 billion in revenue
Maintaining vital local tax offsets and business competitiveness incentives
Implementing targeted tax offsets, including a change in the cigarette tax rate, and tightening severance tax exemptions
To keep the sales tax rate as low as possible, the plan will expand the sales tax base to many services that are already taxed in other states in addition to eliminating over 200 current exemptions. Many of these exemptions are no longer relevant since they were related to the personal income tax and/or corporate income and franchise tax.
The sales tax exemptions retained under the plan will help protect low-income residents and also preserve Louisiana’s business competitiveness. These include:
Constitutionally protected sales tax exemptions, including food for home consumption, residential utilities, prescription drugs and fuel.
Manufacturing, machinery, and equipment (MM&E), non-residential utilities, farm and agriculture, drilling rigs, vessels greater than 50 tons, tangible personal property for lease or rental, manufacturers’ rebates and trade-in value on new vehicle purchases, and preservation/rehabilitation of historic structures.
Exemptions for vendors compensations
Exemptions for certain non-profit organizations (religious, military, disabled)
Sales tax exemptions on purchases whose cost is already borne by the taxpayer: those made by federal, state and local governments.
The services added to the state sales tax base include personal, professional and other services that are currently excluded from the state sales tax base. The services that will be excluded include healthcare, education, construction, real estate, financial services, legal services, oil and gas services, and funerals. The purchase of advertisement (“buys”) will be excluded. The plan will also protect small service providers by creating a “de minimis” exemption that will exclude any service providers with annual revenue under $10,000. The plan will also modify some severance tax exemptions.
As part of achieving simplification of Louisiana’s tax structure on a revenue neutral basis, Louisiana’s excise tax rate on cigarettes ($0.36) would rise to match the Texas rate ($1.41), factoring in a 40 percent discount for behavioral changes. Additionally, the current variable rate for other tobacco products would rise to match the Arkansas rate of 68 percent of manufacturer’s price.
Protecting Louisiana’s Families and Retirees
To ensure that Louisiana families at all income levels will be better off under the plan, the plan includes targeted relief to retirees and low-income working families. The plan protects low-income families and retirees who pay little or no income tax currently by creating the Family Assistance Rebate Program (FARP) and Retirees Benefit Program (RBP).
FARP compensates low income households based on the impact of the increased sales tax over any benefit from the reduction of income taxes. RBP provides a rebate for eligible retirees (including municipal, state, federal, Social Security/disability, private sector) that have less than $60,000 adjusted gross income that will compensate them based on the impact of the increased sales tax over any benefit from the reduction of income taxes. This will help ensure that these retirees are not made worse off since they don't pay income tax today.