Jindal’s model for tax reform
With dueling budgets being introduced on Capitol Hill this week, the possibility of tax reform is the talk of Washington. As we predicted before last November’s elections, tax reform will be on the agenda in 2013 – but has its best chances in the states. We are seeing that demonstrated Thursday by Louisiana’s Republican governor, Bobby Jindal.
Jindal unveiled what could be, if approved by the legislature, the boldest, most pro-growth state tax reform in U.S. history. His plan, outlined in Baton Rouge this morning during a joint meeting of the House Ways and Means Committee and the Senate Revenue and Fiscal Affairs Committee, calls for the elimination of all state personal and corporate income taxes, as well as the state franchise tax on capital stock. This would be replaced by an increase in the state sales tax rate to 5.88 percent, up from 4 percent. The sales tax would also apply to a broader base of goods and a number of services previously untaxed.
Many governors around the country have proposed rate-reducing tax reform, but Jindal’s plan sets a gold standard for pro-growth reform. His proposal could mean more disposable income for families while increasing the job-creating capacity of employers across the Pelican State.
It would also make Louisiana’s tax code more conducive to economic growth. A recent Organization for Economic Cooperation and Development report ranked taxes according to their negative economic impact. The study concluded that taxes on income and capital, which Jindal’s plan would eliminate, were the most damaging.
Louisiana ranked 32nd on the nonpartisan Tax Foundation’s 2013 State Business Tax Climate Index. If Jindal’s plan is approved and signed into law, the state will jump to No. 4 on that index.
Jindal’s proposal is a model not just for other states but also for lawmakers on Capitol Hill. His plan adheres to the conservative principle that the tax code should not be used to pick winners and losers in the economy. It demonstrates that the purpose of real tax reform is to make the tax code more efficient and competitive – not to raise additional revenue. Jindal’s plan creates a predominantly consumption-based tax system and does so in a way that he estimates will raise the same amount of revenue for the state as current law.
President Barack Obama and congressional Democrats appear to view tax reform as a vehicle for higher taxes. The White House and folks at MSNBC would have one think that House Republicans have become extremists for insisting that tax reform not result in a net tax increase. Yet back in 1986, the last (and, many contend, only) time Washington passed comprehensive tax reform, there was bipartisan consensus that it should be revenue-neutral.
Then-Senator Bill Bradley (D-N.J.) and then-Ways & Means Committee Chairman Dan Rostenkowski, a Democrat from Chicago, agreed with President Ronald Reagan that reform should clean up the tax code – not be a Trojan horse for higher taxes. This is what Jindal’s proposal would do.
Tax reform is one of the most politically difficult undertakings for lawmakers. It becomes almost impossible, however, when the public perceives it as a covert attempt to raise taxes.
Georgia offers a cautionary tale. Two years ago, state legislators introduced a reform package that would have significantly cut the state income tax – particularly important, since the state is flanked by two states with no income tax – while increasing reliance on sales tax. There was one major problem: The plan as a whole resulted in a multibillion-dollar tax increase. Fellow legislators, and the public, revolted against it.
Though the Georgia plan was reworked so it was no longer a net tax increase, the damage had already been done. In the end, it failed to pass. While some Republicans, including former Florida Governor Jeb Bush and Senator Lindsey Graham (R-S.C.), are asking the GOP to repeat this folly at the national level, Jindal is wisely not making this mistake in Louisiana.
The national media and Acela-corridor crowd continue to focus on the bickering Washington, but they can learn what real tax reform looks like by looking to Louisiana.
PHOTO (Top): Governor Bobby Jindal speaks during the Republican Leadership Conference in New Orleans, Louisiana June 17, 2011. REUTERS/Sean Gardner
PHOTO (Insert A): A Louisiana Individual Income Tax Return form is seen in a screen capture image. REUTERS/Louisiana Department of Revenue/Handout
PHOTO (Insert B): President Ronald Reagan addresses a news conference in Washington, Octover 19, 1983. REUTERS/Mal Langsdon