Louisiana 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 state's low income citizens.
Jindal is proposing ending Louisiana's state individual and corporate income taxes. The plan would be revenue neutral by raising sales and excise taxes.
Louisiana's corporate income tax rate is progressive, ranging from 4 percent for businesses that make less than $25,000 per year up to 8 percent top rate for high earning corporations.
The state's individual income tax rate ranges from 2 to 6 percent on a progressive scale.
Louisiana has the third highest combined state and local sales tax already at 8.86 percent — a 4 percent state sales tax and an average local sales tax of 4.86 percent.
The suggestion is to increase the state sales tax to as high as seven percent.
However, making the primary state tax a consumption tax rather than an income tax could have a number of potentially undesirable effects on the state.
First, this type of tax compels citizens to save rather than spend, which has the potential to slow an economy. People spending money cause a state's economy to grow as economic activity accelerates.
Secondly, this tax could compel citizens to buy out-of-state when making significant purchases, potentially harming sectors of the Louisiana internal economy.
But even more significantly, this action makes the state taxation scheme more regressive. A regressive tax means there is a higher effective rate of taxation the less money a taxpayer has.
Here's what the Tax Policy Center had to say about the potential severity of the impact on the poorest:
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. [...] 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.
A November 2009 study from the Institute on Taxation and Economic Policy found that sales and excise taxes hit the lowest economic quintile much harder than the highest quintile. Even more, it found that state income taxes were more a progressive tax system, where the effective tax rate increases as income increases.
See this chart for more detail:
You'll notice that a state increasing the rate of the red bar (sales tax) and removing the blue bar (income tax) would adversely impact the lowest quintiles. Such a policy would increase the burden that the lowest income residents have while decreasing the burden that the highest income residents have.
Now, here's that same chart, only specifically for Louisiana in 2007:
Here's a look at how Louisiana' existing taxation rate impacts each group. Notice that killing the income tax rate would harm the lowest quintile.
Even more, killing the income tax rate and jacking up the sales and excise tax rates on goods would increase the effective tax burden on the poorest Louisianans and would cut the wealthiest Louisianans' tax rate significantly.
Jindal's argument is that this policy will make Louisiana more competitive compared to neighboring states when it comes to taxation. He believes that the businesses that Louisiana will attract will be economically beneficial to the state, even though the consumption tax could slow down spending in Louisiana.
All told, Jindal's policy may or may not be good for the state's economy. But it's certainly not good for the poorest, and it's exceptionally good for the rich.
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