Objective: Maximize state growth
BY MICHELLE MILLHOLLON
Capitol news bureau
January 21, 2013
In preparing a dramatic change to the state’s tax code, the Jindal administration considered and rejected the idea of a state property tax.
Tim Barfield, executive counsel at the state Department of Revenue, said the better concept ended up being an elimination of the state’s personal income and corporate taxes.
Seven states — Texas, Florida, Washington, Nevada, South Dakota, Wyoming and Alaska — already lack a state income tax. Louisiana is one of three states helmed by Republican governors considering a similar elimination.
Nebraska Gov. Dave Heineman proposed abolishing his state’s individual and corporate taxes shortly after Gov. Bobby Jindal floated the same idea. In the alternative, Heineman will strive to lower tax rates.
North Carolina is weighing a sales tax hike in exchange for eliminating personal and corporate income taxes. Groceries would become more expensive. Diabetics would pay sales tax on their insulin. Buying property would cost more.
The proposals coincide with an economic downturn that forced many states to cut their budgets year after year. The common theme is a desire to spur growth, both in revenue and in jobs.
Jonathan Williams, director of tax and fiscal policy at the American Legislative Exchange Council, chalks up the move toward tax elimination in Republican-led states as a difference in philosophy among governors rather than a difference in political affiliation.
“Conservative governors are more concerned about growing the state’s economy. Liberal governors out there are more concerned about (wealth) redistribution,” he said.
Opinions are mixed on the effects of eliminating income taxes.
Williams helped produce a study that concluded states that tax less, especially on work or investments, experience higher growth rates.
The study found that five states without state income tax or with only a partial state income tax saw tremendous population gains between 2001 and 2010.
In Louisiana, the Baton Rouge-based Public Affairs Research Council, or PAR, warned that the repeal could destabilize the state’s revenue base and trigger increased taxes in the future.
North Carolina is considering increasing the combined state and local sales tax rate from 6.75 percent to 8.05 percent.
Nebraska aims to erase millions of dollars in sales tax exemptions.
“As the national recession continues, more states are becoming more willing to consider bold actions to try and improve their state’s economic woes. And the academic literature has been mounting during the last several years that strongly indicates that states without income taxes perform far better than the others, and that sales taxes are the least harmful to growth,” said Brian Balfour, director of policy at the Civitas Institute.
Civitas is a North Carolina-based institute that advocates conservative policy solutions.
Louisiana’s elimination likely will be coupled with a state sales tax increase and an expansion in what is taxed. States want to broaden their tax base to services, such as an appointment with a lawyer or a number-crunching exercise with an accountant.
The Jindal administration is working behind the scenes to prepare for the legislative session that starts in April, when the proposal will be debated.
One of the nation’s top accounting firms soon will join the administration’s payroll to validate data and double-check analysis.
The governor’s proposal will solidify in the coming weeks, producing finite details about how nearly $3 billion in revenue would be replaced, what services now would be taxed and how the poor would not be allowed to sink even further into poverty.
State Treasurer John Kennedy presented a list of questions he wants answered, including whether revenue will be more or less volatile.
PAR’s president, Robert Travis Scott, said sales tax is relatively stable and grows modestly. However, he said it doesn’t grow with the economy as well as personal income taxes.
Scott Drenkard, an economist with the Tax Foundation, said corporate tax is considered the most volatile while property tax is the least volatile. Sales tax, he said, comes immediately before property tax in volatility.
“I’m confused by people arguing against sales tax,” he said.
The foundation is a nonpartisan tax research group based in Washington, D.C.
During a presentation recently at the Louisiana Association of Business and Industry’s annual meeting, Barfield showed a slide comparing the volatility of sales and personal income taxes. Personal income plummeted and skyrocketed between 2001 and 2011 while sales taxes’ dips and rises were much more modest.
Barfield said the worst-case scenario under the governor’s proposal is a state sales tax increase from 4 percent to 7 percent.
“I’m hoping we don’t have that scenario where it’s 7 percent. But, frankly, I don’t think it’s going to be 4 percent either,” he said.
Diversification will come through doing things such as increasing the state tobacco tax and capturing sales tax on Internet purchases, he said.
Scott said the Jindal administration appears to be trying to accommodate the uncertainties and other challenges.
“The transition period to a new system contains a lot of obstacles and land mines, and I think these issues are being given attention also. To review all this, the administration is seeking analysis from outside consultants, as it should. I think when that work is done we will see a clearer picture of their plan, and frankly I think it will be quite compelling to a lot of people,” he said.