BATON ROUGE, La. (AP) - The consulting firm hired by Gov. Bobby Jindal's administration for economic analysis of his tax plan said in a report this week that states should not enact a key plank of Jindal's proposal.
Ernst & Young economists say sales taxes on services bought by businesses are bad ideas because companies pass those costs to customers or shrink economic activity in a state where such taxes are levied.
Jindal is proposing a new 6.25 percent sales tax on services that would fall on businesses of the type that is the focus of the Ernst & Young criticism. The tax would be charged when businesses pay other companies for accounting work, bookkeeping, payroll services and a long list of other items.
The Republican governor proposes to use the revenue from that new sales tax on services, along with an overall increase in the state sales tax and tobacco taxes to help offset the cost of eliminating the state's income taxes as Jindal wants.
"To the extent that services are primarily consumed by business, such as professional services, including these business-to-business sales in the sales tax base will have a significant negative consequence," the report says.
Ernst & Young has been doing tax modeling for the Jindal administration, crunching the numbers for the Department of Revenue - but not guiding the policy decisions. Its criticism was included in an unrelated report for the nonprofit Council on State Taxation, called "What's Wrong with Taxing Business Services?"
The sales tax on services proposed by Jindal also would fall on households, who would pay new charges for haircuts, veterinary visits, car repairs and football game tickets. But the Jindal administration has said 80 percent of the sales tax on services would hit businesses.
Jindal's leader on the tax rewrite, Tim Barfield, has said the governor's tax package would shift $500 million in tax costs from individuals to businesses, mainly because of the new tax on services.
Ernst & Young's report says states should consider the negative economic development impacts of such sales taxes on business-to-business sales.
"Several states that have adopted major sales tax changes that extended the sales tax to business purchases of inputs have subsequently, and often quickly, voted to repeal the extensions," the report says.
Jindal has said sales taxes provide a more stable and predictable source of revenue for the state. He said they also offer people and businesses the ability to choose how and when they want to pay taxes because they can determine which goods and services they buy.
"Eliminating income taxes is the best way to create jobs in Louisiana. More than 60 percent of the new jobs created over the past 10 years were in states without income taxes," Jindal spokesman Sean Lansing said in a statement Friday.
He said other states have proposed or used taxes on business services to increase state revenue, but he said businesses will have the benefit of the eliminated corporate income and franchise taxes under Jindal's plan.
The powerful Louisiana Association of Business and Industry opposes the governor's tax plan because it is estimated to increase costs on businesses.
In his weekly column released Friday, LABI President Dan Juneau noted that one of the three authors for the Ernst & Young report is Robert Cline, the company's national director of state and local tax policy economics and the man "running numbers" for the Jindal administration tax plan.
"He might want to give those departments a copy of his COST study so they can see how flawed the huge tax on business services they are proposing would be from an economic development and business competitiveness standpoint," Juneau said.