Archive for January 23, 2013

Know the Facts: ITEP Sidesteps the Truth

BATON ROUGE – Recent news reports refer to a policy brief from the Institute on Taxation and Economic Policy (ITEP). This study examined various news reports that provided incomplete assumptions about the proposed tax reforms currently under deliberation in Louisiana. The title, “Proposal to Eliminate Income Taxes Amounts to a Tax Increase on the Bottom 80 Percent of Louisianans,” cannot be substantiated because the official plan has not been released.

The Louisiana Department of Revenue (LDR) examined ITEP’s study and found the following to be true:

1.  ITEP’s numbers do not reflect reality. ITEP falsely assumes a “worst case scenario” in which every dollar in state revenue lost from the elimination of the personal income tax (PIT) and the corporate income and franchise taxes (CIFT) is restored solely by increasing the state sales tax rate. Under those conditions, the state sales tax rate would need to be 7.94%[1] to make up the lost revenue. No scenario currently under consideration requires a sales tax rate nearly that high. 

2.  ITEP’s financial assumptions are not accurate. News reports available to ITEP state that other sources of revenue are currently under consideration – the elimination of some sales tax exemptions, the expansion of the sales tax base to include more services, and an increase in the excise tax on cigarettes. ITEP considers none of these revenue sources in their calculations. Though ITEP does not know the details of the package, including some of these revenue sources in their analysis could have given the public a more realistic sense of the tax reform package before it is released. Even including guesses about potential revenue from these sources would have made for a more accurate analysis than what ITEP produced.

3.  ITEP’s financial scope is distorted. ITEP does not factor in an offset (such as an Earned Income Tax Credit [EITC] or some other mechanism). News reports available to ITEP reveal that a variety of offset mechanisms for low-income people are currently being discussed and analyzed.  The state is determined to ensure that the final proposal will make no Louisiana citizen worse off.

4.  ITEP’s financial conclusions are suspect. Though ITEP claims to be using Bureau of Labor Statistics Consumer Expenditure Survey data (a reputable source), the spending habits attributed to low-income people are suspicious. ITEP claims that the average Louisianan with an income of $25,000 will experience a net tax increase of $566. Louisiana tax data indicates that the average taxpayer at this income level pays $363 in income tax. After factoring in the benefit from eliminating the personal income tax, this taxpayer would need to pay $929 more in sales tax than what he/she currently pays.[2]  Assuming that this taxpayer’s expenditures remain constant, he/she would need to have annual sales taxable expenditures of roughly $23,500 to realize that kind of tax increase.[3]

5.  ITEP’s scheme ignores key facts. Food for home consumption, prescription drugs, and residential utilities are exempt from state sales tax. Expenditures such as rent or housing costs, insurance costs, etc. are also not subject to state sales tax. So, in order for ITEP’s study to be remotely accurate, a taxpayer with an income of $25,000 must spend $23,500 per year on things like clothing, restaurants, electronics, home supplies (cleaning supplies, home maintenance supplies, etc.), some forms of entertainment, etc.  It is extremely unlikely that the average person with income at $25,000 exhibits such exorbitant spending habits. 

[1] REC 2012 Collections Data

[2] ($566+$363 = $929)

[3] $23,500 x 4% = $940 sales tax paid (current).  $23,500 x 7.94% = $1865.90 sales tax paid (ITEP rate proposal).  $1865.90 – $940 = $925.90 increased sales tax.