Eliminating Louisiana's income tax could mean higher sales tax, fewer exemptions

01 11, 2013 by The Times-Picayune

Gov. Bobby Jindal's proposal to replace personal income and corporate taxes with sales taxes could involve a mix of higher taxes on purchases, the elimination of exemptions and a "broadening" of the sales tax base to include some services, administration officials said Thursday. The proposal, which would require the state to more than double its sales tax collections, could involve increasing the state sales tax to as much as 7 percent, officials said.

Most of the details of the plan are still being worked out, but the goal of the proposal is to keep sales taxes as "low and flat" as possible, according to Department of Revenue Executive Counsel Tim Barfield.

"Sales tax often involves a lot of flexibility ... and gives the people a lot of choices in how to do things," said Barfield, who has been Jindal's point man on the proposed tax code overhaul. "It's easier for our taxpayers to make decisions to respond and address the changes in the structure."

Jindal announced last year that overhauling the state's tax system would be his top legislative priority for the session that begins April 8. Few, however, expected his package would be this ambitious.

"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 Thursday. "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."

While administration officials cast the plan as a way for Louisiana to attract new businesses and residents, opponents blasted the idea of raising sales taxes, arguing it would shift the burden of paying for state government onto the poor. "This proposal is extremely regressive in nature and we'd have to be very, very careful before we take that particular step," House Democratic Caucus Chairman Rep. John Bel Edwards, D-Amite, said.

Eliminating exemptions, taxing more purchases

Income taxes, corporate taxes and franchise taxes are projected to bring in a total of $2.92 billion this year, according to the latest state forecast. Sales taxes are projected to bring in about $2.6 billion.

Administration officials on Thursday said a 7 percent state sales tax rate is on the high end of the scale under consideration. "Our current rate is 4 percent," Barfield said. "Frankly, there's a lot of possibilities between 4 and 7 percent."

One way to rein in the increase would be to eliminate sales tax exemptions. In the fiscal year that began in July 2011, Louisiana had roughly $2.5 billion worth of sales tax exemptions. Roughly $700 million of that came from exemptions on groceries, residential utilities and medicine, Economic Development Secretary Stephen Moret said.

Those exemptions, which were enshrined in the state Constitution by the Stelly Plan in 2002, will not be touched, officials said. "When you have these exemptions built in constitutionally, it has a progressive component," Barfield said.

But the state could make some services subject to sales tax. House Ways and Means Committee Chairman Joel Robideaux, R-Lafayette, said services such as landscaping, but not professional services such as accounting or legal services, could be subject to sales tax.

So-called "sin taxes" are also being considered by the administration. Barfield mentioned increasing the tax on tobacco, which is lower than most other states. In 2011, Jindal vetoed the renewal of a 4-cent tax on tobacco, saying he had "made a commitment to the taxpayers of Louisiana to oppose all attempts to raise taxes." But the governor would consider raising the tobacco tax if it was part of a revenue-neutral package, Barfield said.

Robideaux also suggested that the final proposal include an automatic lowering of the sales tax rate if the changes bring in more money than expected in the first year.

Officials say plan will aid economic development

Key lawmakers were told of the plans at a Wednesday meeting at the Governor's Mansion; the broad details of the proposal were first reported by The News-Star in Monroe.

While Jindal said the proposal would put "more money back into the pockets of Louisiana families," Barfield and Robideaux instead couched the elimination of income and corporate taxes as a way to eliminate complexities and attract businesses. Robideaux said the only feasible way to make up that revenue is to turn to sales taxes.

If income taxes could be eliminated without raising property taxes, putting Louisiana on better footing than Texas in attracting corporations, "I think we'd be remiss in our duties if we didn't pursue it," Robideaux said.

When trying to attract new businesses, Louisiana is at a disadvantage because its tax rates are higher than many states, Barfield said. However, that can be misleading because of the 468 tax exemptions available, he said. The proposal would simplify that process, he said. ""One of the goals here is to be very competitive from a state economic development standpoint," Barfield said.

Because the proposal is designed to bring in the same amount of money as the state currently collects, it's not clear whether the plan would result in residents paying less in taxes. Louisiana already has the third-highest sales tax rate in the U.S., when state and local taxes are taken into account, according to a report last summer by The Tax Foundation. That combined rate of about 8.86 percent is higher than eight of the nine states that don't have an income tax.

Tennessee leads the nation with a combined average sales tax of 9.43 percent, and has no income tax. Texas and Florida, both considered competitors for economic development projects because of their proximity, don't have income taxes.

Opponents challenge 'regressive' tax increase

Pushing the full package through the Legislature could prove to be a challenge for the Jindal administration. While eliminating taxes requires only a simple majority, raising the sales tax or imposing it on purchases that are not currently covered would require a two-thirds vote of the Legislature.

Several controversial bills that were part of Jindal's legislative agenda last year could not muster that much support.

On Thursday, Democratic lawmakers attacked the plan, noting that sales taxes are the most regressive way for a state to bring in revenue. "Essentially, he's saying he will support a tax increase, which he said he'd never do," said state Sen. Karen Carter Peterson, who also leads the Louisiana Democratic Party. "This tax increase will disproportionately affect the lower-income people in this state."

Edwards, of Amite, said the plan would "put a bigger burden of funding state government" on those at the bottom of the income ladder.

Barfield said the administration is looking for ways to mitigate those concerns, possibly by a replacement for the Earned Income Tax Credit. The credit, which is offered by both the state and federal governments, is targeted at low-income taxpayers. Officials did not say Thursday how that kind of tax credit would be offered in the absence of state income taxes.

The ability of residents to buy goods on the internet, thus circumventing sales taxes, also worries Edwards. Peterson, of New Orleans, said she worries that despite the administration's promise that the plan would be revenue-neutral, the state would bring in less money. "This will further decimate the stability and revenues we need to sustain a viable state," she said.