Is Governor Jindal’s Tax Proposal A Bold Move or Just Politics?

Governor Jindal’s plan to eliminate the state income tax and raise the state sales tax is being met with opposition on both political fronts but will actually bolster the Governor politically whether it passes or is defeated.

While bits and pieces of the Governor’s plan are leaking out, we don’t know the full details yet. As such, any discussion is purely speculation.

This much is true: eliminating the state income tax and replacing it with an increased sales tax will only marginally increase the tax burden on Louisiana residents. It will result in more money in the pockets of Louisiana residents, who, in turn, will spend more on goods and services that may be taxed.

In addition, the elimination of corporate income taxes could lead to Louisiana becoming more competitive in recruiting corporations and lead to more jobs. More jobs equal more potential spending on goods and services.

In theory, the plan should be essentially revenue neutral.

So, what’s all the fuss about?

Democrats believe that sales taxes impact lower income residents who are the least able to pay the taxes. Given that most lower income residents pay ZERO in income taxes and little, if any, in property taxes, lower income residents currently pay little to nothing in real taxes, other than sales tax, and only contribute pass-along taxes like gasoline and cell phone taxes to the state treasury.

Of course, Democrats fail to consider that any increase in the state sales tax will also include exemptions to it. Exemptions for grocery sales and prescription drugs will lower the impact on lower income residents. Exemptions on grocery purchases made with the Louisiana Purchase Card, will also lessen the impact.

Republicans, as well as some Democrats, are also concerned about a potentially bitter budget battle as the state faces a large deficit.

Currently, seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) have no personal income tax. Two additional states (New Hampshire and Tennessee) only tax dividend and interest income.

Given that they are close neighbors, Florida and Texas are often discussed regarding their lack of a state income tax.

At 4%, Louisiana’s current state sales tax is among the lowest in the country. Texas assesses sales tax at a 6.25% state rate while Florida imposes a 6% state sales tax. Both allow liberal exemptions including exemptions on grocery purchases for home consumption.

Texas also imposes a sales tax on many personal services including Escort Services. That alone could help balance Louisiana's budget.

While the state rates are fairly comparable, there is an alarming difference between Louisiana, Florida and Texas regarding the local sales tax option.

In Florida, the maximum combined local/county sales tax is a 1.5%. The local/county sales tax in Texas is capped at 2%.

Louisiana has no caps on local/parish sales tax. Because of the local/parish additions, Louisiana’s average sales tax is 8.85%, 3^rd highest in the country. The additional local/parish taxes range from 3% to 7% making the total sales tax rate range from 7% to 11%. The maximum sales tax in Florida is 7.5% and is 8.25% in Texas. With a projected 3% state sales tax increase, Louisiana’s sales tax range will increase to 10% to 14%.

In unincorporated Jefferson Parish, we pay 8.75% - 4.75% for the Parish (2.5% to the Parish Council, 2% to the School Board, and .25% for Law Enforcement) and 4% to the state. Kenner also pays 8.75% but it is divvied up differently with the same 4.75%/4% split. In Kenner’s case, the city receives 2.58%, Jefferson Parish gets .17% and the School Board receives 2% of the 4.75% local sales tax.

In Louisiana, the reality is that the state typically gets less than the local/parish governments when it comes to sales tax revenue.

As local governments have kept property tax rates artificially low, and with the inclusion of one of the most generous Homestead Exemption rates in the country, the pressure to raise more money has led to increased local/parish sales tax rates.

According to the Tax Foundation, Louisiana pays the lowest percentage of property taxes in the country at .18% of home value. Texas residents pay the 3^rd highest rate at 1.81% of home value.

So, a better solution might include an increase in the state sales tax coupled with a reduction in the local/parish sales tax rate with an increase in property taxes to keep local/parish government tax revenue also neutral.

Of course, this could all be an exercise in futility if the Governor is unable to persuade a majority of the State House and Senate to approve any sales tax increase with a corresponding elimination of the income tax.

That alone may be no easy feat.

But, even if loses, the Governor still wins politically. As a term-limited Governor, Jindal has nothing to lose in Louisiana and is playing to the national stage. The national press will surely discuss Jindal's plan and Conservative pundits will toss Jindal's name around in lofty terms. If the plan is defeated, it will be because the State Representatives and Senators couldn't see Jindal's "vision" or they bowed to pressure from outside forces.

And, if he wins, Jindal will gain even more national prominence setting him up for potential future campaigns for President or Vice-President, or significant cabinet positions in a Republican Administration (assuming he’s not part of the ticket).

Let’s hope that the Governor is sincere about reforming Louisiana’s tax system and will also couple that with “real” spending reform.

That could help Louisiana more than having a former Governor in Washington.