Should Louisiana Dump Its Income Tax for a Bigger Sales Tax?

By :: January 14th, 2013

Last week Louisiana’s Republican Governor Bobby Jindal proposed replacing the state’s individual income and corporate taxes with a higher sales tax. While details are scarce, initial media reports suggest Jindal would both raise the sales tax rate and make more goods and services subject to the levy.

Louisiana’s current 8.86 percent average combined state and local sales tax rate (4 percent state rate and 4.86 percent average local rate) is already the third highest in the nation. Jindal’s plan would boost it to the highest level in the country by far. One published report suggests the state levy alone could be increased to as much as 7 percent.

Broadening the sales tax base is a mixed bag. On one hand, taxing more goods and services helps to limit the tax’s distortions across consumption and also allows for a lower tax rate, all else equal. But base broadening can also push more of the burden to low-income households. Louisiana currently excludes groceries and utilities from taxation; taxing them would be especially difficult for families with limited resources.

In fact, even without base broadening, the proposal would dramatically shift more of the burden of Louisiana’s taxes onto lower-income individuals. Since low-income households devote a higher share of their income to consumption, they end up paying higher effective tax rates than higher-income households which tend to spend less and save more. This concern is particularly stark in Louisiana, which was recently ranked as the sixth most unequal state in the country by one measure of inequality.

The higher tax burden for low-income households is no small concern. Last year Louisiana collected $2.9 billion through the individual and corporate income taxes and another $2.6 billion through the general sales tax. Maintaining current revenues with Jindal’s plan would require that sales tax revenues more than double, which means that, absent a significant broadening of the tax base, the tax rate would also have to rise substantially.  For households that don’t pay income taxes and save little or no income, this amounts to close to a 4 percentage point drop in after-tax income—about the same magnitude of tax pain for these households as going off the fiscal cliff.

The swap would have theoretical advantages: Taxing consumption, rather than income, encourages saving. An expanded sales tax base, perhaps including some services, eliminates unequal treatment across types of spending. And getting rid of two major tax bases may lower administrative costs for state revenue collectors and virtually eliminate compliance costs for Louisiana’s taxpayers. Lastly, sales taxes can “export” the tax burden to non-residents, namely tourists, who spend in Louisiana but don’t live there.

Proponents of this major tax swap may also claim that eliminating the corporate tax will attract more businesses to Louisiana and dumping the personal income tax could make the state a magnet for high-income individuals.

Not all of these claims carry weight. There is little evidence that Americans will move to take advantage of lower state income tax rates. And since seven states already have no income tax, households that would move exclusively for lower tax rates would likely have already done so. It’s true that sales taxes help shift the tax burden to out-of-state tourists, but higher sales tax rates can also push consumption to other states, untaxed internet purchases, and off-the-book transactions.

Ultimately, the shift could lower compliance and administrative burdens, and help to boost long-run growth a little. But it’s not worth asking low-income households to shoulder such a large share of the burden to achieve such a small statewide gain.

20Comments

  1. anonymous  ::  1:40 pm on January 14th, 2013:

    Sales taxes are the most direct of all taxes. They are not pay-as-you-go like income taxes and sales taxes are not escrowed monthly like property taxes. Sales taxes increase the price of products for small businesses dollar for dollar. Also, more discipline is needed from business owners to remit sales taxes. If any increase is necessary, why not property taxes? Louisiana has the lowest median property tax rate in the country. Historically, the main determinant of prosperity is the property tax rate at the local level where spending is the highest.

  2. Smith  ::  2:27 pm on January 14th, 2013:

    Another theoretical advantage would be the ability to collect on the shadow economy.

  3. Bobby Jindal’s New Tax Plan Could Crush Poor People In Louisiana | ImpressiveNews  ::  2:57 pm on January 14th, 2013:

    […] Governor Bobby Jindal has proposed an overhaul of taxation for the state of Louisiana that has many worried about the impact it could have on that […]

  4. Michael Bindner  ::  3:41 pm on January 14th, 2013:

    It would be better if he proferred a value added tax rather than a state sales tax, with this tax showing up on receipts. In addition, to keep rates low, he could combine the personal income, corporate income and some of the sales taxes into a VAT-like Net Business Receipts Tax, which is essentially a Subtraction VAT with carve outs for subsidies to low income families over and above what is needed to pay any other consumption tax. Such a credit could be paid with wages rather than at the end of the tax year and could also replace the Supplemental Nutrition Assistance Program with benefit levels that actually allow people to eat throughout the month and afford more spacious living quarters than are available to most poor people. People taking TANF would instead be paid the minimum wage to become literate, with that payment enhanced with the same child tax credit. My proposal at the federal level includes a surtax on high income individuals who would spend less – however because state income taxes are low in most cases, such an adjustment is likely not worth the trouble.

  5. Bobby Jindal’s New Tax Plan Could Crush Poor People In Louisiana | New Yerk Times  ::  4:00 pm on January 14th, 2013:

    […] Governa Bobby Jindal haz propose' an overhaul uv taxashun fo'da state uv Louisiana dat haz many worrie' about da impact it could be on dat […]

  6. cliff  ::  9:02 am on January 15th, 2013:

    Well, yes and no.
    The untaxed shadow economy would shift away from undocumented workers and more toward online retailers

  7. Tax Roundup, 1/15/2013: Branstad not leading on income tax reform. And: Cage Fight! CPAs vs. RTRPs! « Roth & Company, P.C  ::  10:11 am on January 15th, 2013:

    […] Ben Harris, Should Louisiana Dump Its Income Tax for a Bigger Sales Tax? (TaxVox) […]

  8. Will killing the state income tax save the middle class or hurt the poor?  ::  3:52 pm on January 16th, 2013:

    […] “since low-income households devote a higher share of their income to consumption,” wrote Ben Harris at the Tax Policy Center, a joint project of the Urban Institute and the Brookings […]

  9. Will killing the state income tax save the middle class or hurt the poor? | 1040 Tax Plus Services  ::  1:27 am on January 17th, 2013:

    […] “since low-income households devote a higher share of their income to consumption,” wrote Ben Harris at the Tax Policy Center, a joint project of the Urban Institute and the Brookings […]

  10. January 23, 2013 War on Workers News  ::  4:05 pm on January 23rd, 2013:

    […] purchases would, of course, be radically regressive, rewarding the rich and punishing the poor. The Tax Policy Center and the Institute on Taxation and Economic Policy both scrutinized Jindal’s proposal, and […]

  11. There are no real “reformers” in the GOP  ::  11:29 am on January 25th, 2013:

    […] of their income than their higher-income counterparts. For Louisiana to close the revenue hole, explains the Tax Policy Center, it will have to more than double its sales taxes, from the current joint […]

  12. Jindal’s weak-soup speech to the RNC « Something Like the Truth  ::  5:32 pm on January 26th, 2013:

    […] of their income than their higher-income counterparts. For Louisiana to close the revenue hole, explains the Tax Policy Center, it will have to more than double its sales taxes, from the current joint […]

  13. “Same Unpopular Policies And Priorities”: There Are No real “Reformers” In The Republican Party « mykeystrokes.com  ::  10:00 am on January 28th, 2013:

    […] of their income than their higher-income counterparts. For Louisiana to close the revenue hole, explains the Tax Policy Center, it will have to more than double its sales taxes, from the current joint […]

  14. THE LITTLE MAN WHO DESPERATELY WANTS TO BE PREZ « The Widdershins  ::  7:46 am on January 29th, 2013:

    […] of their income than their higher-income counterparts. For Louisiana to close the revenue hole, explains the Tax Policy Center, it will have to more than double its sales taxes, from the current joint […]

  15. Unloved GOP Tax Plans | Democratic Governors Association (DGA)  ::  4:42 pm on April 11th, 2013:

    […] Tax Policy Center: Jindal Plan Would “Dramatically Shift” More Of Louisiana’s Tax Burden On Lower-Income Households. “[B]ase broadening can also push more of the burden to low-income households. Louisiana currently excludes groceries and utilities from taxation; taxing them would be especially difficult for families with limited resources. In fact, even without base broadening, the proposal would dramatically shift more of the burden of Louisiana’s taxes onto lower-income individuals. Since low-income households devote a higher share of their income to consumption, they end up paying higher effective tax rates than higher-income households which tend to spend less and save more. This concern is particularly stark in Louisiana, which was recently ranked as the sixth most unequal state in the country by one measure of inequality.” [Tax Policy Center, 1/14/13] […]

  16. Parade of Failing GOP Governors Descend on South Carolina | My Legal Right  ::  11:50 pm on August 25th, 2013:

    […] Jindal’s Proposed Tax Plan Would Have “Dramatically Shifted More Of The Burden Of Louisiana’s Taxes Onto Lower-Income Individuals.”  “Last week Louisiana’s Republican Governor Bobby Jindal proposed replacing the state’s individual income and corporate taxes with a higher sales tax. While details are scarce, initial media reports suggest Jindal would both raise the sales tax rate and make more goods and services subject to the levy.  […] In fact, even without base broadening, the proposal would dramatically shift more of the burden of Louisiana’s taxes onto lower-income individuals. Since low-income households devote a higher share of their income to consumption, they end up paying higher effective tax rates than higher-income households which tend to spend less and save more. This concern is particularly stark in Louisiana, which was recently ranked as the sixth most unequal state in the country by one measure of inequality.” [Tax Policy Center, 1/14/13] […]

  17. Parade of Failing GOP Governors Descend on South Carolina | District 48  ::  1:56 pm on August 26th, 2013:

    […] Jindal’s Proposed Tax Plan Would Have “Dramatically Shifted More Of The Burden Of Louisiana’s Taxes Onto Lower-Income Individuals.” “Last week Louisiana’s Republican Governor Bobby Jindal proposed replacing the state’s individual income and corporate taxes with a higher sales tax. While details are scarce, initial media reports suggest Jindal would both raise the sales tax rate and make more goods and services subject to the levy. […] In fact, even without base broadening, the proposal would dramatically shift more of the burden of Louisiana’s taxes onto lower-income individuals. Since low-income households devote a higher share of their income to consumption, they end up paying higher effective tax rates than higher-income households which tend to spend less and save more. This concern is particularly stark in Louisiana, which was recently ranked as the sixth most unequal state in the country by one measure of inequality.” [Tax Policy Center, 1/14/13] […]

  18. On Tax Day, The Super-Rich Thank Their Lucky Stars For GOP Govs | Democratic Governors Association (DGA)  ::  1:10 pm on April 15th, 2014:

    […] Tax Policy Center: Jindal Plan Would “Dramatically Shift” More Of Louisiana’s Tax Burden On Lower-Income Households. “[B]ase broadening can also push more of the burden to low-income households. Louisiana currently excludes groceries and utilities from taxation; taxing them would be especially difficult for families with limited resources. In fact, even without base broadening, the proposal would dramatically shift more of the burden of Louisiana’s taxes onto lower-income individuals. Since low-income households devote a higher share of their income to consumption, they end up paying higher effective tax rates than higher-income households which tend to spend less and save more. This concern is particularly stark in Louisiana, which was recently ranked as the sixth most unequal state in the country by one measure of inequality.” [Tax Policy Center, 1/14/13] […]

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