Tax overhaul linked to business rankings
At the top of a “talking points” memo handed to legislators, Gov. Bobby Jindal justifies overhauling the state’s tax system in order to increase the state’s ranking on an index drafted by the Tax Foundation.
Stephen Moret, Jindal’s secretary of the state Department of Economic Development, said he probably has called the Tax Foundation more than anyone else in America, seeking guidance on what points to include in a tax revamp that would make the state look better on the group’s “State Business Tax Climate Index.”
Jindal has announced he would release his tax proposals by the end of the week.
“We’ve focused on how best to position Louisiana for faster job growth and improve our state’s business climate in reality and perception,” Moret said, adding that he also consulted with businessmen, corporate executives, site-selection consultants, entrepreneurs and other “think tanks” like the Tax Foundation.
The Tax Foundation is a Washington, D.C.-based group, whose board includes executives with the some of the nation’s largest corporations and officials with political action groups that support national Republican candidates. It has advocated restrained government spending and lower taxes since its founding in 1937.
Opponents say the Tax Foundation index puts too much weight on abolishing income taxes.
The emphasis created a list in which states without income taxes, such as Wyoming and South Dakota, are given high ratings, despite relatively sluggish growth in personal income and gross domestic product indicators. That’s when compared with the economic powerhouses, such as California and New York, which are ranked as the worst states, critics say. The bottom 10 states on the Tax Foundation list are homes to the headquarters of 177 of the Fortune 500 list of the largest companies.
Moret dismissed those statistics as irrelevant to the regional contest to win businesses. A Tax Foundation official said the index is only ranking tax structures and that other factors should be considered for a broader picture.
Jindal handed out what was described as a “talking points memo” to legislators who attended discussions at the Governor’s Mansion about a proposal to radically change how the state collects taxes to pay for services.
At the very top of the memo, which he collected at the end of the meeting, a heading entitled “A Framework for Comprehensive Tax Reform” predicted that if the restructuring proposals were approved, “it is projected to increase our Tax Foundation rankings, which many businesses use to make site decisions, from number 32 to number 4.”
Scott Drenkard, one of the Tax Foundation authors of the “2013 State Business Tax Climate Index, published in October 2012, refused to specify what proposals he discussed with Louisiana officials. “I’ve had a variety of conversations in terms of trying to making decisions with crafting their proposal,” Drenkard said.
The memo describes a tax swap, in which the roughly $3 billion in revenues lost from abolishing personal income tax, as well as corporate income and franchise taxes would be replaced with an increased state sales tax, higher taxes on cigarettes, the elimination of severance tax exemptions and other exemptions, plus the expansion of sales taxes on services as well as goods.
By eliminating the personal income tax and corporate income tax, Louisiana would secure a perfect score in two segments of the Tax Foundation formula that together represent 53.2 percent of the total score, according to Moret. Abolishing the franchise tax — with a 14 percent weighting — would further boost Louisiana’s total score on the index, he said.
A state sales tax rate of 7 percent for every $1 spent — an increase of 3 cents per dollar from current rates and described as a worst case scenario — would drop Louisiana’s ranking in the sales tax component, but that part of the Tax Foundation’s formula has only a 21.5 percent weighting, according to Moret.
The efforts of Jindal’s aides to increase Louisiana’s rankings in the Tax Foundation’s State Business Tax Climate Index caught the attention of economist Robert Tannenwald in his Feb. 25 analysis published in State Tax Notes, a professional magazine.
“They asked the Foundation to suggest reforms that would lift the state’s ranking. The Foundation obliged with several proposals, notably to eliminate the state’s personal, corporate and franchise taxes and to increase its sales tax. Jindal decided to run with it,” wrote Tannenwald, a former Federal Reserve Bank economist who now teaches public policy and budgeting at Brandeis University, in Waltham, Mass.
Tannenwald found “especially disconcerting” the high weight the Tax Foundation put on the elimination of personal income taxes, which he argued not only skewed the findings, but did not best represent what businesses looked at when looking at the bottom line.
The Tax Foundation’s Drenkard said Tannenwald’s criticisms are thoughtful.
But Drenkard counters that more than two dozen recent studies show that taxes on corporate and personal income are the most destructive to economic growth.
An array of brackets and exemptions covers up Louisiana’s relatively low taxes, Moret said.
When businessmen look at states to locate a facility, the tax system is one of the first hurdles crossed and that’s where Louisiana doesn’t look as good as other states, he said. These changes would make Louisiana look better to businessmen and site selection consultants, Moret said.
“In our society we like to rank things,” said James A. Richardson , director of the Public Administration Institute and a professor of economics at LSU. “It’s part of our makeup and I think that’s fine. But we have to be careful that we don’t become overwhelmed by rankings ... I don’t think there is solid academic evidence, research, that altering or eliminating the income tax is suddenly going to make you a showcase for economic development.”
Taking a position on which both Moret and Drenkard agree, Richardson said business location decisions are made for a multitude of reasons.
Texas has advantages that Louisiana doesn’t share regardless of this state’s tax structure, Richardson said. “We can’t duplicate the size of the state, the number of people and how their people are educated; the infrastructure and distribution system they have,” Richardson said.
Businesses need well-trained, educated employees, a well-functioning transportation system and infrastructure to ship goods, said Carl Davis, a senior analyst with the Institute on Taxation and Economic Policy.
Tim Barfield, counsel at the state Department of Revenue and Jindal’s point man on the tax overhaul, condemned the institute as “a liberal special interest group” when the Washington D.C.-based organization in January criticized the outcomes of swapping income taxes for sales taxes.
Davis argues that the Tax Foundation provides lawmakers with justification for the philosophical argument that government should raise revenues with consumption taxes rather than income taxes.
“Clearly, they’re not interested in tax fairness, said state Rep. John Bel Edwards, of Amite and who, as the head of the House Democratic Caucus, has taken a lead in raising questions about Jindal’s overhaul proposal.
Edwards argued that higher sales taxes disproportionately harm the poor and working class because spending on goods takes up a larger part of their monthly budgets. Therefore, increasing sales taxes while eliminating income taxes would benefit richer Louisiana taxpayers, he said.
Edwards, who has announced an interest in running for governor, alleges that Jindal has embraced elimination of income taxes in order to bolster his conservative credentials when he runs for president; even though most Louisiana residents would end up paying more taxes in the swap.