APPEL: The “Fiscal Cliff” And The Never-Ending Blame Game

The media is positively alive with talk of the “fiscal cliff.” The whole thrust of so much of the chatter seems to be fed by a visceral hatred of everything Bobby Jindal, but though that attitude may support a political case for expanding spending and taxation, it is far too simplistic. We have seen this political practice before, for eight years President Obama blamed President Bush for all the failures of the Obama administration. One has to assume that Louisiana’s current governor and a willing media have accepted Obama’s blame-game strategy as good politics!

We do have a fiscal problem but at the same time we are spending more than ever in our history. So what are the historical events impacting our state budget that has led us to this point? Like all history the end result is an outcome resulting from the many components.

Our basic political philosophy dates to Huey Long populism. The highlights of these underpinnings are that revenue is generally expected to be derived from business not voters (“Don’t tax you, don’t me, tax the man behind the tree”), that money generally flows through Baton Rouge (“He who controls the money, controls the country”), and that the people are assumed to be victims of undefined forces from which their succor is found in state largesse and low expectation of success (“A chicken in every pot”).

The basic tenets of Long-era populism have become deeply rooted and define even today Louisiana’s fiscal structure. In 2002 the Stelly Plan was enacted and about $800 million in sales taxes on food and utilities was exempted from taxation. In order to keep revenues in balance a corresponding amount of income tax was implemented, effectively fulfilling the Long philosophy by shifting tax burden away from a broad swath of taxpayers to a narrower group of income earners.

After Hurricane Katrina the economy was doing well and there was excess revenue from the “Katrina surplus,” a huge influx of state revenue from many sources resulting from rebuilding after the hurricane. With that windfall the state went on a spending spree, increasing spending in many areas but, especially ominously, increasing recurring spending with these onetime funds.

During Governor Jindal’s first year in office there was a substantial outcry from taxpayers to end their extra tax burden and the state reduced the income tax by reducing the Stelly corporate and personal taxes. However, the sales taxes on food and utilities had long before been ensconced in the constitution and remained intact. No one fore saw what would be coming in the next few years including Governor John Bel Edwards, as he voted for the reduction in Stelly tax rates.

During the two Jindal terms total state spending, which as noted had rocketed up as a result of the “Katrina surplus,” was wisely reduced to a level comparable with pre-Katrina levels. Unfortunately the increased recurring expenses were still in place and those commitments had to be met, resulting in a scramble for funding. Governor Jindal failed in two critical ways; first, he was unable to reform government to the extent that he could reverse all of the Long era populist and post Katrina spending patterns. Compounding his mistake he adopted a “no new tax policy” that resulted in using one time money to address recurring expenses. Clearly if we didn’t have the political courage to right size spending there had to have been more revenue. But Jindal refused and due to locked up dedicated funds, important spending streams suffered.

One positive strategy adopted by Jindal was a move to rebalance higher education funding to more closely align with most other states. Before Jindal and resulting from that Long philosophy, higher ed funding was about 70% state funds and 30% student funds. This ratio was the exactly opposite that encountered in most states. After Jindal’s efforts Louisiana’s ratio was re-aligned with other states to 30% state and 70% student funds. He failed however by having achieved no success in addressing the inefficiencies of maintaining four different systems of higher education and far too many sub-par institutions. The result of this failure is that we are underfunding our successful universities in order to support politically motivated spending in our unreformed systems.

Another positive move by Jindal was abandoning the antiquated Charity Hospital system and moving the state’s low income healthcare delivery into a managed care structure This program is still a work in progress but it probably will save the state billions of dollars over time.

Starting after 2008, the national recovery under Obama was anemic, less than 2% growth in GDP per year for eight years. Almost at the same time the price of oil and gas plummeted creating an intra-state recession that resulted in the loss of 27,000 jobs and a major decline in revenues to the state Treasury which according to the Legislative Fiscal Office actually caused the current fiscal cliff.

With the arrival of Governor John Bel Edwards spending shot up, though, as it has turned out, perhaps foolishly in face of the intrastate recession and poor national economy. The amount of state effort (taxes, self generated funds, dedicated funds, and inter-agency transfers – basically what Louisiana taxpayers directly contribute less Federal funds) under Jindal’s last budget was $14.01 bn. Within a very short time Governor Edwards unilaterally accepted Medicaid expansion and pushed to grow many departmental budgets. The result of this is an increase in state effort this year to $15.23 bn, an increase of $1.23 bn, which when combined with Federal funds creates the highest level of spending ever including during the post Katrina spending frenzy!

So taking into account all elements we have first the loss of close to $1 bn in sales taxes under Stelly. This was followed by the loss of another $1 bn in personal and corporate taxes due to the Stelly rate reductions. Next we were hit with a calamity of recession and poor national recovery that severely impacted personal and corporate revenues. And finally, we were saddled with another $1 bn plus in expenses derived from new spending by Governor Edwards.

The result, a witches brew of a mismatch between revenues and expenses, is our very own “fiscal cliff!” As noted there was no one driving factor, no one person a fault; just a series of events, some controllable, some not, but all combining to create our shortfall. Could the “fiscal cliff” have been averted? Of course, had Stelly not been adopted, had the tax rates not been reduced, had Governor Jindal completed his efforts at reducing spending, or had Governor Edwards not committed us to massive spending increases in the face of recession.

But that is all water under the bridge, its history.

There is some good news, Obama is gone and the national recovery under Trump’s tax cuts seems assured. The intra-state recession has abated to some extent and we are in receipt of $144 mn in the current budget cycle and another $200 mn or so for next budget in increased state revenues. Add to that that the Trump tax reforms will create about another $200 mn in state revenue from personal taxes and a yet to be determined amount from corporate taxes.

So some of the uncontrollable aspects of our cliff are fading. But we have done nothing about the controllable elements. The governor’s answer is to raise taxes in order to sustain Huey Long’s legacy. The House seems to favor reforms as a mechanism to reduce spending. Somewhere in there will be the final outcome – tomorrow’s history.

From my perspective I believe that we will see a relatively simple combination of elements to fill in the fiscal cliff. I believe that we will recognize some growing state revenue, we will make some cuts and impose spending reforms, we will clean some pennies of sales tax by ending exemptions, and we will reinstate on a long term basis some percentage of the added one penny sales tax. This combination can be done in very short order but politics being what they may it will not be that easy.

The real problem once we end the shortfall is that we will have done nothing about the fundamental shortcomings in our state. Unlike the governor who views politics through the eyes of a 21st Huey Long philosophy, I am not talking about just revenue reform. I am talking about a complete re-creation of our state, away from all of those practices that have kept us down for so long and its transformation into a modern and economically growing state. Sadly, solving the fiscal cliff will take away any pressure on the governor and legislature to really tackle the outdated structures of our government and our economy, structures that must be recast in order for our people to achieve true prosperity.

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