Remember in high school when math teachers wouldn’t give full credit for answers that weren’t supported with all the work that showed how a student arrived to that answer?
On Friday, a group of 250 clergymen and women challenged the work behind the math used by the Jindal administration to calculate the tax burden on individuals under the governor’s new tax swap plan.
The governor wants to eliminate the personal income tax, the corporate income tax and the corporate franchise tax. He’d replace that lost revenue by raising the sales tax to 5.88 percent, applying the sales tax to more services and tinkering with a few other taxes and exemptions. Jindal says the plan will not amount to a tax hike for citizens or a loss in revenue for the state, but that it will be revenue neutral.
A few think tanks have weighed in on the viability of revenue neutrality. Taxes are hard to predict. The Revenue Estimating Conference, the body that estimates the state’s income every quarter, is proof – calculations are revised nearly every presentation. These think tanks have called into question whether it’s possible to do the math perfectly enough to predict the outcomes of the swap.
Jindal has promised the outcomes of the swap will be a boon to Louisiana. Tim Barfield, Executive Counsel to the Louisiana Department of Revenue and Jindal’s pointman on the tax proposal, has said that the administration’s looked at over 30 studies that show states without an income tax have sported faster growing economies coming out of the recession. An article in the Washington Post this week took a closer look at similar studies.
Clergy: Tax Burden Inappropriately Calculated
According to the clergy, when LDR ran the numbers to illustrate the changes individuals would see in their pocketbooks, it didn’t consider all of the new expenditures.
LDR’s “Tax Burden Analysis” is a one-page spreadsheet that was circulated to the press last Thursday when the governor presented his tax plan to the legislature. It uses numbers from the Consumer Expenditure Survey of the Bureau of Labor Statistics to estimate how much money individuals currently spend on sales tax in each income bracket. Then it hikes up that number up by 1.88 percent and takes the difference to find how much individuals will lose due to higher sales tax. Then, it adds to that total the income tax due in that respective bracket to find how much the tax swap will save.
The clergy group points out: that math only accounts for services previously taxed. It does not account for the slew of new services that will be taxed under the plan.
Tim Barfield said in a written response to the clergy, “More than 80 percent of the expanded sales tax base does not impact families and individuals.”
He said that means LDR’s math is sound: “the formula/methodology… ensures that the tax burden will be reduced for all income brackets even when considering increased taxes resulting from an expanded sales tax base.”
Newly taxed services include management, advertising, payroll, office administrative, and facilities support services, among others. They also include luxury and recreational services, like tickets to performing arts events, photographers, and tanning beds.
Think Tanks: Revenue Neutrality Near Impossible
Gov. Jindal is dedicated to keeping the plan “revenue neutral.” When he introduced it to the legislature, the governor warned them, if it comes to his desk with so many changes that it’s no longer balanced, he’ll veto the bill.
But the non-partisan Public Affairs Research Council of Louisiana is claiming the plan isn’t balanced to begin with. According to PAR’s math, the plan could be off by $650 million. PAR has reviewed the numbers and says the administration is getting the cost of eliminating taxes from fiscal year 2011. But since they’ve estimated revenue using numbers from years in the future, the puzzle pieces don’t match up.
Barfield also issued a response to PAR: “PAR’s analysis does not take into account all the data used by the Louisiana Department of Revenue,” Barfield said. “We have always maintained that we used 2011 Fiscal Year data as a starting point for our analysis, but we have not stopped there. A standard approach to estimate the future is to begin with the best data as of today.”
The Council for a Better Louisiana, another think tank, is also skeptical. It said in a report on the swap that it should begin with some transitional period. CABL referenced a tax swap Texas implemented in 2006, when the state got rid of the corporate income tax in favor of a corporate margin tax. For the first year of the plan, companies were required to fill out a tax form as if they were going to pay the tax, but didn’t have to send in any money. From those forms, government officials gathered that the state would take in $5.9 billion, but when the plan went into full effect, it took in only $4 billion. “That doesn’t mean the same thing will happen in Louisiana,” CABL wrote, “but it does seem to indicate that we need to allow ourselves some realistic period of transition.”
After all, the Jindal administration has referenced with frequency parts of Texas’ tax model, which includes no income taxes and high property and sales tax.
Washington Post: Tax Swap Won’t Spur Economy
According to some studies, Texas and other states with no income tax show some of the highest rates of economic growth in the country. The Jindal administration argues that eliminating the personal income tax and the corporate income and franchise taxes would put Louisiana among them.
But The Washington Post has critiqued that notion. An article published last week claims the policy would be unavoidably regressive and wouldn’t boost growth like the governor claims it would. Most of the evidence The Post provides should be taken with a grain of salt: it gets its numbers from the Institute for Taxation and Federal Policy, a liberal think tank. But reports from American Legislative Exchange Council, or ALEC, a right-leaning think tank, show the exact opposite.
Both ALEC and ITFP compare growth measurements of the nine states without a personal income tax to the nine states with the highest income tax, and use an average of the rest of the states as a control. ITEP references a state’s gross domestic product, median household income growth, and average annual unemployment rates.
ALEC also measures GDP, but looks to non-farm payroll employment growth, population growth, and tax revenue growth. ITEP finds that there isn’t much difference between the three categories, and that states without income tax even lag slightly. ALEC shows states without income tax to be above average in every category.
The Post points out, “There are many more important factors in determining state economic growth than are state tax levels.”The article concludes from its amalgamation, “So the evidence that scrapping income taxes and replacing them dollar-for-dollar with sales or property taxes would help growth is thin at best.” And finally, “Depending on your political preferences, [the tax swap] could be a poor bet.”
Tax reform debates continue March 26. The House Ways and Means Committee will take up the effects of eliminating the corporate taxes. As the debate continues in the legislature, the plan is sure to morph and strengthen.
Join WRKF after the session starts for a public forum to discuss the tax overhauls. On April 17 at 6 pm at the Old Governor’s Mansion Jim Engster will moderate “Politics and Pinot” with panelist Chairman on the Ways and Means Committee Rep. Joel Robideaux (R-Lafayette), PAR’s President Robert Travis Scott, and Louisiana Budget Project President Jan Moller, among others.