A few weeks ago I wrote on the income-for-sale-tax swap some conservative governors are pursuing as an alternative to Washington’s income tax rate debate.
Today, Governor Bobby Jindal of Louisiana, a big proponent of the sales-for-income-tax swap, announced his plan in Baton Rouge.
A press release from Jindal’s office lists the estimated benefits:
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
- 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
But there are also some possible drawbacks. As I mentioned in my column, moving to a heavier reliance on the sales tax often requires lawmakers to carve out lots of exemptions. The danger is that, over time, a sales tax code could become as special interest driven as the current income tax code with all its byzantine deductions and exemptions.
Without agreeing to the substance of this critique, Jindal’s press release gives a clue as to what might be in store if his plan passes:
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.
Reducing the number of tax exemptions has many benefits, including limiting the state sales tax rate increase required to generate sufficient revenue and greater stability in revenues. 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.
Reasonable people can debate the merits of which kind of tax reform is best to make the code simpler and fairer. Personally, I prefer a flat tax on income with few if any exemptions because it leaves the least amount of room for special interest mischief.
That said, Jindal’s plan deserves a hearing. If it passes and works in practice, expect to see Jindal’s tax reform model – if not Jindal himself – on the 2016 presidential campaign trail.