Governor Bobby Jindal’s plan to eliminate income tax is raising eyebrows. Jindal’s office confirmed Thursday that the plan would make up for lost revenue by increasing the state sales tax.
Dr. James Richardson is a professor with LSU’s EJ Ourso School of Business. According to Richardson, eliminating corporate and personal income taxes would leave almost a $3.5 billion gap in the state’s revenue. “If you make it up with purely sales taxes,” Richardson says, “you’re talking about doubling the rate, approximately. Or if you say we’re going to tax some things we don’t tax right now, expand the base, maybe you can keep it a bit lower.”
The details of Jindal's plan have not been released, but Richardson says if the income tax is completely eliminated, exemptions for sales tax, on items like food, may have to be eliminated as well.
The sales tax is what economists like Richardson call a “regressive tax.” A regressive tax is one in which the tax burden falls more heavily on those with low income. “That means a larger part of their income will be subject to tax,” Richardson says.
Because a sales tax is flat – everyone pays the same amount, no matter how much they make – those with low income end up paying a higher proportion of their income. Richardson says that with rebates, this burden could be avoided.
“I believe the Jindal administration is very honest when they say want to protect those people as much as they can,” Richardson says, “but if we try to protect those people – that is if we try to give them a tax rebate, if we try to make it up some other way, that’s a cost. So to get the money you want, you have to raise the rates more, which may cause other complications.”
Richardson also serves on the state’s Revenue Estimation Committee. Louisiana legislatures rely on the revenue estimation each year to plan the state’s budget. Richardson says if the sales tax can’t make up the difference, Louisianians may pay more individually for the public services they use. “Like roads,” Richardson says, “we’ll have more toll roads for example.”
“There are different ways of financing public services. We have not chosen to do it that way up to this point, but we could do it differently. That’s like a tax, but we’ll call it a ‘tuition’ or a ‘fee’ or a ‘toll.’”
Richardson says some other states that don’t have personal income taxes, like our neighbor Texas, rely on these fees and other sources of income. Texas homeowners pay much higher property taxes, for example. “And the local governments pay a lot more for local services,” Richardson says, “they have a lot less state support.”
But Richardson says it’s hard to compare other states as a business model for eliminating the corporate income tax. “Other state governments work differently,” Richardson says.
Richardson says it’s probably too soon to tell if cutting the income tax will spur growth in Louisiana. If the sales tax is raised, items will cost more, which may be a disincentive for Louisianians to spend.
Richardson says shoppers may not notice the tax on low priced items, like toiletries, for example, but luxury items may now be out of reach for some. “Go buy a new car, a new refrigerator. Go buy something that has relatively high prices attached to it,” Richasrdson says. “Then you’ll notice it, you’ll see it.”
He expects Louisianians to find other ways to purchase high-price items. They may go to a neighboring state to buy a car.
The high sales tax may affect local businesses, too. “A jewelry store in New Orleans, a local company, like Clark’s in Shreveport or Lee Michaels in Baton Rouge,” Richardson says. “That’s real money.”
But Richardson says right now, it’s too soon to tell what the effects of Jindal’s proposal will be. “We have to wait for the whole tax proposal to see where does [the burden] fall. All we’re discussing right now is the possibilities,” Richardson says.
“But looking at the alternatives there aren’t too many options. There aren’t too many ways to raise that much money easily. If there were,” Richardson says, “we would have already done it.”