Policy Documents

Research & Commentary: Louisiana Tax Reform

January 31, 2013

Louisiana Gov. Bobby Jindal recently announced a new tax reform proposal that would eliminate Louisiana’s personal and business income taxes while increasing state sales taxes and removing certain tax breaks. Jindal says the reforms will save Louisiana families money and encourage businesses to come to Louisiana, invest, and create new jobs. According to the nonpartisan Tax Foundation, Jindal’s proposals would improve Louisiana’s business climate from 32nd to fourth overall on its State Business Tax Climate Index.

The Tax Foundation notes personal and corporate income taxes are generally considered the most destructive taxes because economic growth arises from production, innovation, and risk-taking, factors that are stunted when dollars are taken out of the hands of businesses and individuals through these taxes. 

Louisiana’s complex tax code creates high administrative costs for the government and high compliance costs for businesses and individuals. States across the nation have been lowering or eliminating their income tax in order to spur economic growth: Since 2007 ten states have lowered their income tax rates, and several other states are considering similar changes this year. 

Studies consistently show that states with no income tax perform better economically and have greater job and population growth than income tax states. In Rich States, Poor States, economists Arthur Laffer and Stephen Moore note, “Over the past decade, states without an income tax have seen 58% higher population growth than the national average, and more than double the growth of states with the highest income tax rates.” 

Jindal’s proposal also would eliminate the franchise (or “capital stock”) tax. A franchise tax is levied on businesses and partnerships chartered within a state. It acts as a privilege tax: A company must pay the tax to be allowed to do business in the state under its corporate name. Franchise taxes, like all corporate taxes, are not really paid by the corporation, however, but by customers (through increased product and service prices), employees (through lower wages), and others. Eliminating the franchise tax will improve Louisiana’s competitiveness by removing a double tax on business. 

Jindal’s tax reform plan is a strong step for improving Louisiana’s economic competitiveness and returning tax dollars to the state’s citizens and businesses. Income and corporate tax cuts have improved state economies across the nation, and although more details are needed about how Jindal’s plan will work, Louisiana should give this proposal serious consideration. 

The following articles examine income tax reform, franchise taxes, and Jindal’s tax reforms from multiple perspectives.

Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. These range from “Above all else: Keep taxes low” to “Protect state employees from politics.” 

Louisiana Governor Wants to End Income and Corporate Taxes
http://news.heartland.org/newspaper-article/2013/01/11/louisiana-governor-wants-end-income-and-corporate-taxes
Writing in the Heartlander digital magazine, Steve Stanek reports on Louisiana Gov. Bobby Jindal’s plan to ask legislators to end the state’s personal income tax and corporate tax and replace them with a higher sales tax. 

Governor Jindal’s Bold New Tax Plan
http://taxfoundation.org/blog/governor-jindals-bold-new-tax-plan
Scott Drenkard of the Tax Foundation analyzes Jindal’s proposed tax reforms and tells how the changes would affect Louisiana’s score in his organization’s State Business Tax Climate Index. 

Research & Commentary: Franchise Taxes
http://heartland.org/policy-documents/research-commentary-franchise-taxes
Heartland Institute Senior Policy Analyst Matthew Glans examines franchise taxes and how different states are approaching reform. Lowering or eliminating franchise taxes improves a state’s competitiveness by eliminating a double tax on business, Glans notes. 

Rich States, Poor States
http://heartland.org/policy-documents/rich-states-poor-states-alec-laffer-state-economic-competitive-index
The fifth edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams offers both individual-state and comparative accounts of the negative effects of income taxes. 

The U.S. Tax System: Who Really Pays?
http://heartland.org/policy-documents/us-tax-system-who-really-pays
Writing for the Manhattan Institute, economist Steven Moore examines popular conceptions and misconceptions about the impact of tax rates on economic productivity and fairness. 

The Potential Effect of Eliminating the State Corporate Income Tax on Economic Activity
http://heartland.org/policy-documents/potential-effect-eliminating-state-corporate-income-tax-economic-activity
Laura Wheeler, senior researcher at the Fiscal Research Center (FRC) of the Andrew Young School of Policy Studies, summarizes some of the better studies on the effect of state corporate income tax changes on economic activity. Wheeler then uses the results of those studies to estimate the effect of eliminating a state’s corporate income tax on economic activity within the state. Wheeler concludes that low state corporate income taxes have a positive effect on investment and employment in that state. 

Institute Brief—No Income Tax: The Key to Economic Growth
http://heartland.org/policy-documents/institute-brief-no-income-tax-key-economic-growth
This brief from the Public Interest Institute examines how states with no income tax are doing compared to those with income taxes: “Studies show that states without an income tax have greater economic growth rates than states with an income tax, including greater rates of income growth, population growth, and job growth, and are more attractive to businesses looking for locations to build or expand.” 

Personalizing the Corporate Income Tax
http://heartland.org/policy-documents/personalizing-corporate-income-tax
Gerald Prante and Scott Hodge discuss in this Fiscal Fact piece the effect of corporate income taxes on individual households. “Examining income groups, Chamberlain and Prante found that low-income households pay more in corporate income taxes than they pay in personal income taxes. Geographically, households in largely urban congressional districts and metropolitan areas bear a disproportionate share of corporate income taxes today and, thus, would receive a significant boost in living standards if the corporate tax burden were reduced,” they write. 

Tax Efficiency: Not All Taxes Are Created Equal
http://heartland.org/policy-documents/tax-efficiency-not-all-taxes-are-created-equal
In this study, Jason Clements, Niels Veldhuis, and Milagros Palacios examine how governments can extract tax revenues in the least costly and economically damaging manner in order to improve economic performance.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News Web site at http://news.heartland.org/fiscal, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.