Bobby Jindal’s Tax Failure
This week, Louisiana Governor Bobby Jindal announced that he is backing off his signature plan to repeal his state's income tax and replace it by raising the sales-tax rate and expanding the sales tax to more items. This is not surprising.
In the last 50 years, exactly one U.S. state has repealed a major (personal income, general sales or property) tax: Alaska, following the discovery of massive oil deposits. If you don't find the equivalent of the North Slope in your state, you shouldn't expect to get rid of a major tax.
Sales-tax expansion proposals have nearly as grim a track record as tax-repeal proposals. It's easy to draw up a sales-tax reform plan that will get the support of tax policy experts from the left and the right: A sales tax with a lower rate applying to a broader swath of consumption is better for the economy than one with a high rate applying to few items. Yet expansion efforts repeatedly fail, with proposals dying in the last few years in California, Georgia, Illinois, Maine, Maryland, Massachusetts and Rhode Island.
Why? People get used to paying no taxes on certain things. Businesses whose goods and services are exempt from tax tend to effectively lobby for special exemptions. Such exemptions water down reform, requiring a higher tax rate and producing arbitrary rules that become politically difficult to defend. For example, Maine's 2009 sales tax reform, repealed by popular referendum, extended taxes to miniature golf but not regular golf.
I will admit to having once been a part of this problem: As an intern for a congressional campaign in 2004, I convinced our finance director to insert a single sheet of toilet paper, stamped with the phrase "Taxed by Allison Schwartz," inside a fundraising letter attacking our opponent for voting to expand the sales tax to toilet paper. (Most other paper goods are taxable in Pennsylvania.) We lost the election, but the tax exemption for bathroom tissue survived.
Jindal's sales-tax expansion proposal faced all these problems plus two more. One is that instead of using sales-tax base expansion to cut the sales-tax rate, he wanted to raise it to pay for income-tax repeal. This meant his plan would shift Louisiana's tax burden away from the rich toward the middle class, and therefore he did not get the support from the left that a sales-tax reform might otherwise draw.
The other problem was that Jindal's method of tax-base expansion was not very sensible. An ideal sales tax should apply to all consumption exactly once, meaning it should include business-to-consumer transactions and exclude business-to-business transactions. Taxing transactions between businesses leads to "tax pyramiding": a sale is taxed multiple times before reaching the final consumer, meaning the tax embedded in the price far exceeds the actual tax rate. This is unfair and also inefficient, because it punishes businesses that choose not to vertically integrate: If I run a restaurant, my customers pay more tax if I buy my pastries from a third-party baker than if I bake them myself. (Depending on how my state taxes pastries.)
Jindal's administration was bragging that his plan would cause lots of tax pyramiding. An official in Jindal's department of revenue told the Louisiana House Ways and Means Committee that 80 percent of the new sales tax on services would be borne by businesses. This announcement was meant to be an explanation of how the plan could cut taxes on individuals in all income brackets. But it caused yet two more problems. One, it led the Louisiana Association of Business and Industry, normally friendly to Jindal, to come out against the plan. Two, it undermined the case for reform: Sales-tax base broadening is supposed to make the tax base more ideal, but Jindal was effectively announcing that it would not.
Advocating the replacement of state income taxes with sales taxes remains a cottage industry for conservative think tanks around the country. They have had a partial success this year in Kansas, where the legislature paid for a modest reduction in the state income tax by making a "temporary" sales tax increase permanent. But conservatives have had less success than they expect with this agenda because they haven't admitted to themselves the tradeoff it involves. Sales taxes do indeed appear to be better for the economy than income taxes. But they are also much more regressive, so a shift toward sales tax buys economic growth at the expense of greater inequality. This fact, which Jindal was not prepared to rebut, was a key reason his plan died.
And that observation brings me to my lonely plea for the property tax. Property tax is, from every dimension, better than sales tax. It is modestly regressive, but not nearly as regressive as sales tax. It does not face the major challenges with collection that sales tax does. It produces stable tax revenues, meaning fewer budget crises. And it is less distorting (meaning, better for the economy) than either income tax or sales tax.
Louisiana happens to have extremely low property taxes. A push to replace the state's sales tax with a higher property tax would achieve goals of interest to conservatives (greater business investment and economic growth) and liberals (increased tax progressivity). Perhaps now that Jindal's income-tax repeal plan is dead, he could turn his attention in that direction.
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