LDR’s Tim Barfield: PAR analysis of tax reform based on flawed assumptions

BATON ROUGE – PAR’s assumptions are erroneous. I have met with the members of PAR and shared with them the core data of this plan. PAR’s analysis does not take into account all the data used by the Louisiana Department of Revenue. We have always maintained that we used 2011 Fiscal Year data as a starting point for our analysis, but we have not stopped there. A standard approach to estimate the future is to begin with the best data as of today. This we have done, but only as the starting point. The Legislative Fiscal Office and other economic experts agree with our methodology. Our revenue projections will extend to FY 2014-2015 and will be revenue neutral. Again, we have shared our data and methodology with PAR on multiple occasions, and we will continue to do so throughout this process.

Tim Barfield
Executive Counsel
Louisiana Department of Revenue

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KNOW THE FACTS: Tax proposal critiques ignore crucial facts

BATON ROUGE – Today, both the Baton Rouge Advocate and Gannett News printed stories concerning the Governor’s ideas for tax reform that were one-sided and lacked fact-checking and opposing views of how the reforms could benefit Louisiana. The stories were based on comments made by a special interest group. 

Both stories simply cited the group’s comments as facts and lacked an opposing view about how eliminating the personal and corporate income tax could help Louisiana’s economy grow. For instance, multiple studies show that companies and people move to places where taxes are lower.  Additionally, the Gannett article cited as fact a report issued by the Institute on Taxation and Economic Policy (ITEP) that erroneously claims the effects income tax reform would have on Louisiana by ignoring many key factors and making false assumptions.

Below are a number of key facts and figures that were left out of the Advocate and Gannett stories:

Studies Show That States Without An Income Tax Create More Jobs:

Studies Show That Between 2002 And 2012, 62% Of The Three Million New Jobs In America Were Created By The Nine States Without An Income Tax. “A new analysis by economist Art Laffer for the American Legislative Exchange Council finds that, from 2002 to 2012, 62% of the three million net new jobs in America were created in the nine states without an income tax, though these states account for only about 20% of the national population.”  (Editorial, “The State Tax Reformers,” Wall Street Journal, 1/29/13)

“The No-Income Tax States Have Had More Stable Revenue Growth, While States Like New York, New Jersey And California That Depend On The Top 1% Of Earners For Nearly Half Of Their Income-Tax Revenue Suffer Wide And Destabilizing Swings In Their Tax Collections.” (Editorial, “The State Tax Reformers,” Wall Street Journal, 1/29/13)

Reporting Based On A Debunked Institute on Taxation and Economic Policy (ITEP) Study:

Gannett News Bases Reporting On An ITEP Study That Is Greatly Flawed And Has Been Debunked. “A previous study of what’s known about the governor’s plan said it appears to present a tax increase for 80 percent of Louisiana taxpayers but a significant tax break for the top 20 percent of wage earners and businesses.” (Mike Hasten, “Studies Question Wisdom Of Swapping Taxes,” Gannett , 2/13/13)

The ITEP Study Is Deeply Flawed:

ITEP Uses “Worst-Case Scenario” Figures To Conduct Their Study, Figures That Are Not Under Consideration For the Plan.“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% to make up the lost revenue. No scenario currently under consideration requires a sales tax rate nearly that high.” (“Know the Facts: ITEP Sidesteps the Truth,” Louisiana Department Of Revenue, 1/23/13)

ITEP Does Not Factor In To Its Study Offsets For Low-Income Groups That Are Being Considered, Including An Earned Income Tax Credit. “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.” (“Know the Facts: ITEP Sidesteps the Truth,” Louisiana Department Of Revenue, 1/23/13)

ITEP’s Study Ignores Key Factors, Such As The Fact That Many Essential Goods Are Exempt From State Sales Tax. “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.” (“Know the Facts: ITEP Sidesteps the Truth,” Louisiana Department Of Revenue, 1/23/13)

The Non-Partisan Tax Foundation Said The Louisiana Tax Reform Plan Would Greatly Improve The State’s Standing Nationally:

The Tax Foundation, A Non-Partisan Tax Research Group, Stated That If The Louisiana Tax Reform Plan Is Passed, The State Would Move From 32nd To 4th Overall On The List Of Best State Tax Structures. “For now though, all told, the changes would bounce Louisiana from 32nd to 4th overall on our list of tax structures (assuming the changes were in place as of July 1, 2013).” (Richard Morrison, “Louisiana Tax Reform: Sizing up the Jindal Plan,” The Tax Foundation, 1/18/13)

Tax Foundation: “This Plan Is A Step In The Right Direction. Corporate And Individual Income Taxes Are Generally Considered The Most Destructive Taxes To Economic Growth, And Both Have A Great Deal Of Complexity And Compliance Costs Associated With Them. Elimination Yields A Perfect Score In Those Components Of The Index.”(Richard Morrison, “Louisiana Tax Reform: Sizing up the Jindal Plan,” The Tax Foundation, 1/18/13)

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Statement from LDR Executive Counsel Tim Barfield on ITEP study and job creation

BATON ROUGE – It is ironic that ITEP – a liberal special interest group – launched an attack on the same day the Wall Street Journal editorialized in support of our proposal as well as other states who are seeking to eliminate income taxes. We have a fundamental philosophical disagreement with ITEP about how to help the poor and improve job opportunities for all Louisianans. Contrary to ITEP’s definition of fairness, we believe that the less money the government takes from people’s incomes, the better.

The best way to alleviate poverty is to create jobs, and the way to create jobs is by structuring a tax code that is fairer and simpler so that Louisiana can continue to foster an environment where businesses want to invest and create job opportunities for all of Louisiana’s citizens. Study after study has shown that companies move to places where taxes are lower, and job creation is the only sustainable way to combat systemic poverty.

There are progressive measures in the current tax code to help low-income groups, which we will retain in our final proposal. Sales tax exemptions are currently protected by the Louisiana Constitution and will remain so. The basic necessities of life – groceries, prescription medicine, and residential utilities – will remain sales-tax free. The proposal will also include some form of an Earned Income Tax Credit to offset any additional sales tax burden that might impact low-income Louisianans.

ITEP ignores an inconvenient truth: the states without a personal income tax – four of which are named in ITEP’s “Terrible Ten” list – helped create the most jobs in America over the last decade.

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Know the Facts: Personal Income Tax and the Economic Growth of States

Who Grows?

  1. From 2001 to 2011, states without a personal income tax of any kind experienced average annual GSP[1] growth of 4.81%, whereas states with a tax structure similar to that of present-day Louisiana experienced average annual GSP growth of 3.69%.[2]
  2. States without personal income tax grew their economies on average 1.13% more each year than those structured like present-day Louisiana.
  3. Had Louisiana’s economy grown 1.13% more each year between 2001 and 2011, it would have been 6% larger (about $15 billion or more than 100,000 jobs) than its actual size at the end of 2011. [3]
  4. Texas, a state with no personal income tax, grew at an average annual rate of 5.15% between 2001 and 2011.  New York, a state with a relatively high personal income tax, grew at an average annual rate of 3.49%. 
  5. In 2001, Texas’s economy was $42 billion smaller than New York’s economy.  By 2011, Texas’s economy was $151 billion larger than New York’s because of its faster economic growth.
  6. From 2002 to 2012, 62% of the three million net new jobs in America were created in the nine states without an income tax.[4]

 


[1] GSP, or Gross State Product, is a measure of the economic output of a state.  It is analogous to GDP, or Gross Domestic Product, which is the measure of the economic output of a nation.

[2] 2001-2011 Bureau of Economic Analysis, Public Domain. http://www.bea.gov/

[3] Louisiana Workforce Commission, Civilian Labor Force, December 2012.

[4] The Wall Street Journal, Jan. 30, 2013, on page A12 in some U.S. editions of The Wall Street Journal, with the headline: The State Tax Reformers.

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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.

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Know the Facts: Sales Taxes & Income Taxes

BATON ROUGE – With news outlets continuing to report on the Governor’s goal of eliminating personal and corporate income taxes, some comparisons have been made between the sales tax and the income tax, and what it means for individuals and the state. Here are some facts and figures to keep in mind:

1. Sales tax is a MORE STABLE form of revenue compared to the personal income tax. According to the Louisiana Revenue Estimating Conference (REC) and the Louisiana Department of Revenue (LDR), sales tax collections have historically been MORE STABLE than personal income tax collections.  (REC Historical Data; LDR Annual Reports). Additionally, according to R. Alison Felix, who authored “The Growth and Volatility of State Tax Revenue Sources in the Tenth District,” state sales taxes have proven to be a more stable source of revenue for year-to-year budgetary expenditures.”

2. Over a 30-year period, the nonpartisan Tax Foundation used 26 different economic studies to determine sales taxes were MORE BENEFICIAL for economic growth than both personal and corporate income tax. (Tax Foundation Special Report No. 207 December 18, 2012)

3. Eliminating personal income tax will create a business climate that encourages MORE BUSINESS INVESTMENT and MORE JOBS. According to the nonpartisan Tax Policy Center, America’s economy would steadily grow by “0.6 percent larger than otherwise after two years; 1.8 percent larger after ten years; and 3.6 percent larger in the very long run” if the nation switched to a tax system that relied on sales tax, not income tax. (Tax Policy Center) 

4. Sales tax grows with the economy. When compared to other sources of revenue, sales tax is relatively stable during economic downturns resulting in more revenue as the need arises. 

5. Governor Jindal’s proposal will KEEP the Constitutional protections for the exemptions of food for home consumption, prescription medicine, and residential utilities. These exemptions result in the average individual or family with income under $30,000 per year having almost half of their annual purchases exempt from state sales tax. These progressive provisions lessen the impact of the sales tax on lower income individuals and families.

6. In order to offset unfair impacts to low income groups, Governor Jindal’s proposal will set aside funding to operate an Earned Income Tax Credit or a similar mechanism. 

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Tim Barfield Discusses Tax Reform

LDR Executive Counsel Tim Barfield met with the Rotary Club of Baton Rouge on December 12, 2012, to discuss reforming Louisiana’s tax code.

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