Jindal “Parks” Controversial Income-for-Sales Tax Swap
With opposition from Louisiana’s business and religious communities, as well as resistance from Republican state lawmakers, Governor Bobby Jindal announced he will “park” his plan to replace the state’s income tax with a higher sales tax.
The devil was in the details, says Josh Barro, a Bloomberg economics and financial writer.
The other problem was that Jindal’s method of tax-base expansion was not very sensible. An ideal sales tax should apply to all consumption exactly once, meaning it should include business-to-consumer transactions and exclude business-to-business transactions. Taxing transactions between businesses leads to “tax pyramiding”: a sale is taxed multiple times before reaching the final consumer, meaning the tax embedded in the price far exceeds the actual tax rate. This is unfair and also inefficient, because it punishes businesses that choose not to vertically integrate: If I run a restaurant, my customers pay more tax if I buy my pastries from a third-party baker than if I bake them myself. (Depending on how my state taxes pastries.)
Jindal’s administration was bragging that his plan would cause lots of tax pyramiding. An official in Jindal’s department of revenue told the Louisiana House Ways and Means Committee that 80 percent of the new sales tax on services would be borne by businesses. This announcement was meant to be an explanation of how the plan could cut taxes on individuals in all income brackets. But it caused yet two more problems. One, it led the Louisiana Association of Business and Industry, normally friendly to Jindal, to come out against the plan. Two, it undermined the case for reform: Sales-tax base broadening is supposed to make the tax base more ideal, but Jindal was effectively announcing that it would not.
For conservatives, it is part of Economics 101 to remind liberals that all taxes paid by businesses get passed on to consumers. With a statewide popularity rating now lower than President Barack Obama’s, it’s too bad the very bright Governor Jindal had to (re)learn that lesson the hard way.