The Great Debate

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.

“Tax relief is an achievement for families struggling to enter the middle class,” the president trumpeted, shortly after Congress, by sweeping bipartisan margins and after a bruising battle, had lowered taxes for almost all Americans.  “For hard-working lower income families, we have cut the bottom rate of federal income tax from 15 percent to 10 percent. We doubled the per-child tax credit to $1,000 and made it refundable. Tax relief is compassionate, and it is now on the way.”

Despite a furious counterattack from the opposition, the president had scored a major victory by securing lower tax rates for everyone in the middle class on down.

President Barack Obama last week after narrowly averting the fiscal cliff?  Nope, President George W. Bush in June 2001, signing the first set of his much-sought-after tax cuts. Perhaps the “compassionate” was a giveaway.

A year ago Thursday in Osawatomie, Kansas, President Barack Obama delivered a fiery defense of the middle class. It marked a turning point in the president’s economic argument — and helped him win reelection, despite historic economic headwinds.

“This is a make-or-break moment for the middle class,” Obama told the crowd, hundreds of whom had lined up overnight in frigid conditions.

The middle class faces another make-or-break moment in the intensifying fiscal showdown. If congressional Republicans deny tax relief for 98 percent of Americans to preserve a tax windfall for the top 2 percent, then the failed dogma of trickle-down economics has won again — despite being pummeled in the election last month.

Policy and political circles are now both talking about the prospect of comprehensive federal tax reform next year. From Capitol Hill to Wall Street to Main Street, people are asking how this reform will be structured. They should look to states across the country for their model. Many are due to embark on sweeping overhauls, even complete rewrites, of their tax codes in 2013.

Lawmakers in numerous state capitals are now poised to introduce major tax reform when they come back into session early next year. As we’ve seen with other policy matters, reforms that percolate in the states often make their way to Washington. More than half of all state governments are controlled by one political party, so it’s likely that state lawmakers will move far more quickly than the folks on Capitol Hill. What these state legislators do will provide a preview of and parallel the debate in the new Congress.

Consider North Carolina. Republicans took control of the General Assembly in 2010 for the first time since Reconstruction, and next month the Tar Heel State is likely to become the 26th state where Republicans control the governor’s mansion and both chambers of the state legislature. The Republican gubernatorial nominee, former Charlotte Mayor Pat McCrory, has said that tax reform will be a top priority if he is elected, which appears likely given his double-digit lead in the latest polls. The state now has one of the nation’s least competitive tax regimes. But based on proposals being discussed at the capitol, North Carolina lawmakers next year could enact one of the boldest and most pro-growth state tax reforms in history.

The surprise resolution of our national healthcare drama – the mandate is a tax! – has a kernel of solace for Republican partisans saddened by the constitutionality of Obamacare: The mandate is a tax! During President Obama’s 2008 campaign, he promised not to boost taxes on anyone who makes less than $250,000. Technically, the healthcare law now defies that promise.

While the political value of that fact is questionable – Obama technically broke this pledge years ago, with a cigarette tax included in the healthcare bill, and has mostly lowered taxes on working Americans – this is a good opportunity for the president and his administration to recognize that sound policy is going to require higher taxes on everyone, even the middle class.

What’s important is that he figure out how to do it in an economically efficient way that might have a chance of attracting support from Republicans. Luckily, the careful opinion of Chief Justice John Roberts may provide a useful model of how to tax intelligently. In it, he echoes conservative intellectuals like Harvard economist Greg Mankiw and American Enterprise Institute tax expert Alan Viard, who argue that taxing consumption rather than income is smart policy, and that taxing energy is one of the best ideas of all.