Alternatives to Jindal’s tax reform begin surfacing

2nd April 2013   ·   0 Comments

By Christopher Tidmore
Contributing Writer

Governor now wants sales tax rate at 6.25%

Three dueling press conferences last Wednesday guaranteed that there will be some form of tax reform in this Regular Legislative Session starting April 8. They just likely will not look like the plan that Bobby Jindal has put forth.

On Monday, March 25, the Jindal Administration was quick to tout that the governor’s plan to eliminate corporate and person income taxes would jump Louisiana from 32nd on the nonpartisan Tax Foundation’s 2013 State Business Tax Climate Index to No. 4 on that index.

Tuesday morning saw Forbes Magazine lauding New Orleans’ rise as an entrepreneurial center, but querying if the state had to act quickly in a major way to forestall a plateau of the exploding post-Katrina business startups. The tailor-made response appeared to be Jindal’s plan to end income taxes.

By Wednesday morning, a report from Suffolk University’s Beacon Hill Institute (on behalf La.’s Pelican Institute of Public Policy) seemed to confirm Jindal’s contention. No income taxes paid by either businesses or consumers translates into an overall lower tax rate for individuals—even with a 1.88 cent hike in new sales taxes factored in. Even with the then-expanded 5.88 cents taxes on services in the Jindal plan, BHI predicted a $1,000 savings in taxes per average Louisiana family. Of course, this was before the governor’s decision late Thursday night to boost his proposed sales tax rate to 6.25 percent, diminishing that net benefit considerably.

By mid-morning on Wednesday, though, the bad news began. Bobby Jindal’s closest ally in the business community had turned against the governor’s proposal. Dan Juneau, president of the Louisiana Association of Busi­ness and Industry, argued that the tax swap as then-currently structured will hurt business because it shifts a larger portion of the state’s tax burden from individuals to businesses.

Thirty-six different sectors of the economy, not subject to corporate income tax, will suddenly have a nearly six percent gross levy on their proceeds over what they currently pay. “Tax increases on businesses and investments in a slow economy are a recipe for disaster,” Juneau wrote in a press release. “In order to maximize chances for recovery, LABI will oppose any proposal that increases or has the effect of increasing the tax burden on business. That policy has been in the organization’s Program of Work in some form or fashion for decades. It isn’t new. LABI applied it against tax proposals of both Democratic and Republican governors for years. A tax increase approaching a half-billion dollars levied on the business community at large definitely flies in the face of that principal goal of the organization for 2013.”

Juneau estimated that under the governor’s 5.88 percent goods and service taxes will increase the overall business tax burden by $500 million, and that was a step too far. And, that was the figure before Jindal’s decision late Thursday evening to increase the proposed rate to 6.25 percent. “LABI’s policy is clear,” Juneau continued, “If the tax swap proposal is introduced as a net increase in business taxes or is amended during the legislative process to take that form, LABI will oppose it.”

The reaction Friday in the aftermath of the governor’s decision to boost his requested tax rate from the already unacceptable 5.88 percent to 6.25 percent–an increase of 2.25 cents on the dollar for the average purchase — was hardly positive either. As the defacto State Chamber of Commerce, legislators fear LABI’s wrath. The organization’s political action committee arms — SouthPAC, NorthPAC and their affiliates—stand as the largest financial backers of nearly every GOP legislator, and campaign paymasters of many (perhaps even most) moderate Democratic Representatives and Senators. Even some in the Black Caucus like Sen. Elbert Guillory.

Somehow, the governor’s re­sponse that the only people defending the status quo are “those who can afford to hire attorneys and lobbyists” seemed to fall on deaf ears at the capital. By that afternoon, the House Democratic Caucus was echoing LABI. “The Jindal tax scheme is nothing short of a disaster for small businesses,” said Rep. Stephen Ortego, D-Carencro.

“By the governor’s own figures 80 percent of the new taxes will fall on the backs of businesses,” said Ortego, an architect and small business owner. “Revenue Secretary Tim Barfield testified that this plan will increase taxes on Louisiana businesses by $500 million.”

Rep. Jared Brossett, D-New Orleans, kicked in a local business complaint stating, “Tourism is the driving force of the New Orleans economy. We already have significant sales taxes on tourists. Now, Bobby Jindal wants to give us the highest sales tax in the nation. When national associations look to book their conventions they will shy away from ‘the highest sales tax in the nation.’ They will head to Orlando, Las Vegas, Los Angeles and other destinations.”

“Families will look to other states, other regions, even other nations for places to spend their vacation dollars,” Brossett said. “Bobby Jindal’s tax increase will hit tourism hard all across Louisiana.”

Rep. James Armes, D-Leesville, who represents Vernon and Beauregard parishes, including Fort Polk worried the Jindal tax increase will complicate the ongoing efforts to convince the Pentagon not to reduce troop levels at Fort Polk and noted how the state will lose funds from one key group that stands is a full net positive to the State Treasury, professional athletes who pay income taxes for every game they play in Louisiana.

“When the Falcons played in the Superdome last November, their team payroll for just one game was about $5.4 million. At the six percent {income} tax rate, Louisiana collected $322,000 from the Falcons. Quarterback Matt Ryan alone collected a $718,000 check for that game. His income tax was $43,000,” Armes said.

Armes cited other wealthy professional athletes who pay Louisiana income tax. Kobe Bryant of the Los Angeles Lakers pays $20,000 on a $339,000 game check. LeBron James of the Miami Heat pays $12,800 on a $213,000 game check. “Now, Bobby Jindal wants to give them back that money,” Armes said. “This is reverse Robin Hood. We should call it Jindal Hood.”

Armes also cited the tax savings that Gov. Jindal and some of his top officials will see if the proposal passes. LED Secretary Stephen Moret makes $320,000 a year and will save $19,200. Revenue Secretary Tim Barfield earns $250,000 a year, for a savings of $15,000. Education Superinten­dent John White is paid $275,000 and will take home $16,500 more. Chief of Staff Paul Rainwater garners $201,400 and will net a $12,084 increase. Commissioner of Administration Kristy Nichols makes $144,038, and she’ll take home $8,642 more. Deputy Chief of Staff Taylor Teepell earns $130,000, for a savings of $7,800. Gov. Jindal makes $130,000 too. He’ll save the same $7,800.

The Democratic Caucus managed to demonstrate the personal financial incentives of the governor’s proposal to his aides, but what the members did not offer was an alternative that would raise Louisiana in the tax foundation competitiveness rankings. They left that to the Legislative Black Caucus.

The African-American group of Louisiana’s Senators and Representatives proposed cutting personal income taxes by one to 1.5 percentage points for every state tax bracket and lowering the corporate rate by between one and two percentage points. Like Jindal, the caucus seeks to eliminate the corporate franchise tax.

To pay for their plan, some tax deductions would be eliminated and cigarette excise taxes would increase from 36 cents to 69 cents per pack, but less than the more than a dollar hike the governor proposed.

Unlike Jindal, the LBC would not raise the sales tax rate or tax services, but they would create a Louisiana tax court. Unlike LABI, which did endorse a uniform state tax collection system, the Black Caucus demurred from that reform. However, caucus Chair­woman Rep. Katrina Jack­son, D-Monroe, has proposed an electronic filing system—that includes local taxes—simplify filing for businesses.

The plan would be revenue-neutral, save for the cigarette tax hike, of between $50 million to $70 million. “In this package, the businesses win,” she stated.

It is a testament to how far Bobby Jindal has moved the tax debate in Louisiana that the elimination of deductions to lower tax rates—exactly the GOP plan in the U.S. Congress—has become the default left-wing proposal in Baton Rouge.

However, elimination of these itemized deductions stood as the center of the recently-repealed Stelly Plan. Small business groups would doubtfully accept a net $160 million in net tax hikes today when they fought so feverishly to restore those same deductions on state income taxes in 2008. Rates would have to decrease far more than one percent to compensate these small proprietors for losing their itemized deductions. And the majority of the legislature, members who endured their anger once before after the deductions were phased out temporarily under Gov. Blanco, would not be quick to repeat the unpleasant aftermath.

Nevertheless, the dueling press conferences outline the battle lines in the tax fight ahead. The pathway to a two-thirds majority comes through either a Black Caucus which rejects any hike in the sales tax, or conservative legislators allied with LABI who refuse to eliminate the exemptions that keep many small businesses from paying sales taxes on services. The question is, which group is liable to blink first? If either?

However, the Jindal Admini­stration need not answer that question, just yet, and through that vagueness lay an alternative pathway for Louisiana tax reform. Tim Barfield has presented a reform proposal, but he and his boss have only insisted on only two absolutes. All income taxes must be eliminated, and property taxes must not go up. (And, one gathers on the latter statement, the 4th Floor bows more to Pelican State political reality—the sacred homestead exemption—than assuming a firm ideological stand.)

Nowhere has either the governor nor his Revenue Executive Coun­sel ever mandated a speed for the elimination of personal, corporate, and franchise levies. Just that it must be done. Eventually, though, in a revenue neutral fashion.

That presents an alternative of sorts. Phase out the income taxes over the next decade in stages. Diminish revenues from income taxes slowly; leaving enough time to negotiate what kind of tax code should replace personal income taxes over a period of years. Leave legislators enough time to examine a range of exemptions, increases, and possibilities over a 10-year window.

Make no mistake. Jindal will end income taxes. He and his staff on the 4th Floor are resolute on that point, whatever the political cost. All that remains is the how.

The governor’s proverbial ace in the hole exists in a state constitutional provision. It may take a 2/3 majority to raise a tax, or implement a new one, but it only takes a simple majority to cut or eliminate a tax. Even if a rate is locked in the state constitution, just 50 percent of each house of the legislature can pass a measure not to levy that tax. And, the governor already has that many votes in hand.

After all, just because the constitution allows a tax does not mean that a legislature must levy it. For example, the 1973 Louisiana State Constitution specifically allows up to a 10-mill property tax outside of the Homestead Exemption. No legislature has ever dared to institute that tax, despite being permitted under the basic law. The same could hold true for the state income and franchise taxes. Jindal knows this.

The governor does not have to replace them in his bill. Just get rid of the personal and corporate rates and leave it to the legislature to find the revenues to replace them. Already a majority in both House supports the concept of doing just that. For all of the governor’s challenges on the Left and the Right, there is little political consequences for cutting a hated tax. That is an easy vote for any legislator. Jindal has to spend very little political capital to garner a majority for that purpose.

Replacing them is the hard vote, and therein lays the danger that Jindal’s critics must now embrace. Getting rid of the income tax has taken on a life of its own. The only question remains what will replace it—and how fast those revenues will be needed.

Knowing that some alternatives are better than others, there may be the potential of an interim deal with the Jindal Administration on the speed of the tax phase out. The governor has ostensibly sought his 2.25 cent increase and his 6.25 cent goods and services state sales tax all at once to pay for getting rid of the other taxes immediately. However, what if his critics were to offer to kick the difficult choices until next year in exchange for a slower pace of tax elimination?

Put another way, the sole tax increase generally popular (as long it is revenue neutral) is Jindal’s $1.12 increase in per pack cigarette taxes. Even with the expected decrease in sales such a hike will bring, the most conservative estimates predict that this tax increase will earn $300 million in expanded revenues.

That is the exact sum necessary to eliminate all income taxes for those over the age 62, and embark Louisiana on the path to become a retirement haven, much as Florida with its comparable climate has managed to achieve.

Imagine if the governor’s critics presented this proposal. “We will phase out the personal income tax over a period of ten years. In 2014, the income tax for those over the age of 62 will disappear. In 2015, the income tax for those under the age of 26 will likewise go away. And, in 2016, everyone under the age of 30 will be tax free, as a means of incentivizing young people not to leave Louisiana after college—and help answer the looming problem of out-migration. In the meantime, enacted in this session, will be the provision that any person who has not lived in Louisiana for a period of at least five years, and subsequently moves here, will also be exempt from income taxes.”

The amount earned from the new cigarette tax will cover that retiree reduction, so the fiscal impact in the next two years will be minor. Few, if any, exemptions in the tax code will need to be eliminated, and the sales tax rate need not increase just yet.

People under 30 pay only a small percentage of state income taxes. Loss of that revenue only needs a small tax hike elsewhere to plug the hole. Lastly, people who currently do not live in Louisiana pay no taxes that need to be replaced. No negative fiscal impact exists. Moreover, this provision provides Jindal with the immediate promise that personal income taxes will eventually be abolished. Consti­tutionally, a legislature cannot eliminate direct taxes for one group and not another, unless the tax cut is an accelerated version of an elimination that everyone will enjoy in time. Give a tax exemption to new residents now, and you must give it to all eventually under the equal protection clause.

Legislators could propose a bill that does the above by 2016, phases out taxes for those 39 and under by 2017, 43 and under by 2018, 47 and under by 2019, 53 and under 2020, 57 and under by 2021, and completely by 2022. And, any new migrants who live in the state for at least three months a year, like the corporate executives that Jindal so craves, immediately in 2014 will enjoy tax free status, regardless of age. (That way professional athletes will continue to pay when they play.)

The governor gets to “have his cake and eat it too,” all throughout the Presidential Primary season. He can stand in the snows of Iowa and brag to the GOP electorate that Bobby Jindal rid Louisiana of the ‘hated’ income tax, and not have to deal with the fiscal consequences of doing so.

The next governor who takes office in 2016 will. The real financial cost comes in the later years as the affluent middle aged are struck from the tax rolls. Yet, the Jindal will be shielded from the political pain still. His successor’s first legislative session will not decide on anything until after Jindal’s probable GOP Presidential nomination fight will have ended in mid-April. And, the costs will not come calling until Jindal sits in the Oval Office—or regretfully earns $50,000 per speech on the speaking circuit.

As such the next legislature, meeting after 2016, will be left to face the hard choices on exactly how to replace the bulk of income tax revenue. They might even choose not to end the income tax altogether, when the fiscal implications come clear. Or they would be free to consider options that a Republican Presidential candidate could never countenance—such as an oil processing tax or a tax on dividends. Or perhaps a legislative brave soul will forget the drumming that Buddy Roemer endured more than 20 years ago and revisit higher property taxes.

Regardless, given time, legislators will be able to make their case on either the alternatives—or even the efficacy—of the personal income tax in a less politically charged environment.

More importantly, they may enjoy the unexpected benefit of time. Jindal has asked for a deal on Internet sales taxes. Currently, the state collects nothing from purchases made over the web, out of state. If the federal government were to agree to a proposal to tax Internet purchases, and divide the funds amongst the states, much of the lost revenue from income taxes would be replaced painlessly.

Such a deal may be at least a couple years away, but perhaps not much further. On March 22, the U.S. Senate overwhelmingly passed a non-binding proposal to allow states to collect sales tax on Internet sellers that have no presence within their borders. The amendment to a 2014 budget bill was pushed by Sens. Mike Enzi, a Wyoming Republican, and Dick Durbin, an Illinois Democrat, and was designed to give backers a sense of whether they had enough votes to push forward with final legislation to impose an Internet sales tax. Sixty votes are needed to overcome a filibuster, and senators voted 75-24 for the nonbinding resolution.

The other part of Bobby Jindal’s tax reform mandate — that the state’s corporate income and franchise tax must also be eliminated — stands as a slightly harder goal for his critics to stall over a decade. The governor is less likely to agree to a 10-year phase out of that, even if LABI gets on-board, as it stands as key to his image as the man who brings jobs to Louisiana. Jindal wants that tax break yesterday.

Fortunately, his opponents have some alternatives here as well. The simplest, though, will find few adherents in the Legislative Black Caucus. An increase in the state sales tax of just one penny will garner $750 million, or the same amount produced yearly by the business taxes.

That sum comes from an extra penny on the existing taxed items—just those goods currently subject to state sales taxes. Not one of the 490 exemptions of sales taxes on services and goods from hairstylists to architects needs to see an increase. LABI, which has vocally resisted new taxes on those professions, might be more conducive to a penny jump on goods already taxed in exchange for a major tax break for its larger corporate members.

Of course, the business-lobbying group may not see it that way, and the Legislative Black Caucus certainly will not. There is little chance that African-American legislators will regard a sales tax increase on Louisiana’s poorest, however reduced from its original proposed amount, as any improvement. Still, that does not mean that any form of sales tax increase is impossible. Sin taxes are always popular.

African-American members of the legislature have been the most vocal in the last decade calling for taxing cigarettes by a buck or more per pack. That the poor would pay more disproportionately makes no difference when one taxes a bad habit, in their view. As such, it is the one tax upon which Jindal and his critics seem to agree. Could there be another sin for which the Treasury levies an added fee? Once cigarettes are taxed at rates seen in Texas, could sin taxes on alcohol, or perhaps soft drinks be next?

The excise tax on beer has not increased in Louisiana since the 1950s while other states have boosted it in the subsequent decades. Harder alcohols have likewise endured few hikes in the intervening years. And, the Pelican State imbibes at a rate far beyond most of its 49 peers.

A moderate increase of 50 cents per six-pack of beer or bottle of wine, and a dollar on most other orally ingested ethanols up to 80 proof would create a tax consistent on all alcohols in Louisiana. (There is a tax on each percentage of alcohol in a spirit above 40 percent, which is part of the reason that there is an exponential increase in booze prices as the drink’s potency grows more acute. Making all alcohol taxes consistent wouldn’t go over terribly for Jindal with Iowan social conservative Evangelicals who still bemoan ‘demon rum’!)

Such a tax on alcohol would go much of the way in providing the $750 million needed to eliminate the corporate income and franchise taxes. It does not provide the entire sum, however. For that, Coca-Cola provides the answer. The legislature could levy a five-cent per can and ten cent per liter tax on soft drinks as many other states do.

Justify the tax hike on soft drinks with a Michael Bloombergian argument of fighting youth obesity. Or diabetes, etc. Or some other cause celeb of the nutritionist set. The increased soda costs would still translate into the remaining funds needed to end nearly all the corporate taxes.

The New York Mayor and the Louisiana governor would be on the same side, in a way in which he wins plaudits from Piers Morgan on the Left to Grover Norquist on the Right.

Of course, if none of this works, critics of Jindal’s proposal have one last tactic. Louisiana Trea­surer John Kennedy argues, let the people vote! Since the income and franchise taxes are in the state constitution, vote on their abolition by constitutional amendment, along with whatever taxes one wishes to propose to replace them.

That would require a two-thirds majority for both an income tax elimination and a sales tax hike, but the members would be punting the responsibility to the public. An electorate who might not find the idea of the tax swap, as currently constituted, so attractive.

Or they might.

This article originally published in the April 1, 2013 print edition of The Louisiana Weekly newspaper.