SADOW: Are The Fiscal Hawks Figuring Out How To Play This Game?

With the first move made on the Louisiana budgetary chess board, the next came yesterday setting up the potential for competing versions of the document. What’s next, and does it mean genuine budgetary and fiscal reform is on the way?

Monday, under threat that it would go nowhere unless “one-time” money was removed from it, mostly Republican lawmakers allied with Gov. Bobby Jindal removed this source of funding, almost $500 million worth or two percent of the total spending requested. This is a mix of recurring and nonrecurring revenues, with the former distinguished from any other kind of recurring revenue in that it doesn’t go directly into the general fund, while the latter comes from one-off events not defined constitutionally as nonrecurring.

Removal occurred because another group, mainly of Republicans who call themselves “fiscal hawks,” wanted to use a House rule they had gotten adopted a couple of years previously that called for a two-thirds vote on the use of this kind of money past a certain growth factor in a growing budget. By stripping this money preemptively with dramatic cuts to health care and higher education, they could ship the bill to the Senate on a majority vote, removing the “hawks’” veto power. There, presumably the Senate would amend that money back in and ship the finished product back to the House for concurrence by a majority vote.

But Tuesday, combining with almost all House Democrats, the “hawks” restored the one-time money they claimed they loathed, as this required a two-thirds vote. This was necessary because of the political predicament they have put themselves into, where their only chance of both political and substantive success was to come up with an alternative budget convincing enough to gain all of a House majority, Senate majority, and the governor’s signature. So they had to stall the current version of HB 1 to continue working on theirs, in order to have a chance to amend theirs into it, which they had hoped to have ready at the beginning of this week but now are aiming to deliver it by the middle of next week.

The task they have set for themselves is extremely tricky, because of the strange bedfellow allies they had to take on in order to get this far, because each group of this coalition has different objectives and different risk profiles. For the “hawks,” they assert that general fund expenditures must come from general fund recurring revenue while at the same time their members generally prefer smaller government without tax hikes. Their risk is that to get the former, they may be called upon to accept more government funded through tax increases.

By contrast, the Democrats want tax increases in order to redistribute wealth through bigger government. This serves not just their ideological agenda, but also their political agenda, in that if they can force any faction of Republicans to go onto the record supporting an overall tax increase, they can publicize that all Republicans do so, then claim they are the party better able to increase the size of government in ways that best redistribute wealth, as the GOP will have admitted it also wishes to do the same by that action. It shifts the electoral argument from one they lose, the appropriate size of government, to the one they win, who best maximizes big government redistribution. And they face no risk at all: without the cooperation of the “hawks,” they exert no influence in the budget process, so they have nothing to lose and everything to gain by having this fall into their laps.

Meanwhile, there’s also the other Republicans and Jindal. They will not accept a budget that relies upon increased taxes in aggregate and do not object to using idle funds from recurring sources in places other than the general fund, recognizing that this is a necessary corrective action for a fiscal system that misallocates revenues because of too many and much in dedications going to too many low-priority areas of expenditures. And, because of Jindal, they hold the trump card: there are enough representatives and/or senators that agree with him that if Jindal vetoes the budget (and perhaps any tax increase legislation), it will not be overridden.

Thus, the only chance for a “hawks”-inspired budget to succeed is if, because of their predilections, it contains one-time money less than the growth factor to none of it and, because of the GOP’s and Jindal’s concerns, it also has no aggregate tax increase as part of the agenda. That’s a very fine line to walk, and suggests only three elements can create such a product.

One is further spending reductions in programs not related to tax credits. The problem of this line of country is that it’s not obvious where these could happen. When lawmakers are to the point where they are scrambling to fund small cuts in some instances, this shows not much slack exists in their minds. Other off-the-cuff suggestions are out there such as arbitrary rescission of contracting amounts, but savings here are much fewer than meets the eye. In short, reductions here would not be much more than marginal.

A second that also, in a different way, addresses the spending side is elimination of tax credits. With these, the state subsidizes a certain nongovernment activity by promising a credit against taxes that can take the form of a rebate than exceeds tax liability. This tax code change well might be acceptable to Jindal and other Republicans because it doesn’t actually raise taxation levels, it just stops government subsidization. Even Democrats have questioned whether some of the activities subsidized are worth it, as illustrated in state Rep. Roy Burrell’s HB 444 that provides a laundry list of ones that could sunset in a couple of years.

However, while Jindal and the GOP may not object to the theoretical application of reducing tax credits, the practical application on a case-by-case may come up short, maybe way short. For example, if Burrell’s bill just took out two credits (and immediately) – on inventory taxes and film making – that would make up the gap from no use of one-time money right then and there. But lawmakers certainly would balk at the former, because it removes the offset for local property taxes on idle inventory at the end of the year, which seems unfair as most of that would be used as part of a production process at some point. And even in the case of the motion picture tax credit – which is a flat out gift for engaging in film making activity that mostly goers into the hands of out-of-state interests or wealthy in-state interests that far exceeds benefits to taxpayers – special interests may be potent enough to prevent its repeal. Keep in mind that any such changes require a two-thirds vote in both legislative chambers.

While elimination of some of these may be politically possible within the next month, despite special interest lobbying, this is unlikely to produce the nearly $500 million needed to balance the budget without one-time money and spending cuts elsewhere. That leaves just other one option, previously suggested in passing by one prominent “hawk” leader and hinted at again by another after the votes yesterday – loosening dedications.

This would be a major step forward for the “hawks” if they did actually proceed in this direction and for the first time demonstrate through action that they seriously wished in substance to reform the budget process. Heretofore, their entire campaign has been symbolic in nature, railing against one-time money even though it differed in only accounting definition from other recurring revenues that they blessed. That is but the symptom; the real disease is a fiscal system that misallocates revenues ignoring the ability to direct them in the order of need rather than want. Shattering many dedications to various funds would begin, finally, to addressing the malady.

Thus, by doing this what was once dirty money to the “hawks” suddenly gets cleansed and they may budget it safely to recurring general fund activities while remaining pristine. Given the political and practical limitations on cutting spending and credits, closing the gap will mean the lion’s share of adjustments must come from this source. However, the same difficulty as altering credits exists: dedications are there because special interests lobbied to get them there, and with just a month left in the session, this leaves ample opportunity for obstruction and delay to run out the clock on the session to prevent these changes (which also would have to happen by separate instrument.)

Yet this task would be easier than trying to eviscerate credits. Dedications guarantee only money set aside for spending on something by government rather than by stopping a flow of money outside of it. Those outside forces’ livelihood might be threatened by cutting off that flow, whereas with dedications where excess funding has piled up that will not be missed. Best of all, only majority votes are needed to downsize or to eliminate them.

So the only path to success for the “hawks” is a plan that has small part spending reductions, medium part tax credit elimination, and large part dedication reconfiguration, and with careful attention to details of all three. Otherwise, enough Democrats would be alienated by lack of tax increases on the activities they demonize and/or enough Republicans and/or Jindal would be alienated by the presence of tax increases besides apparently inefficient tax credit eliminations to prevent such a proposal from advancing.

Whether this can be pulled off – which is more than budget reform and actually requires fiscal reform – is another matter. But it can be pulled off only if they finally are willing to move past politically convenient rhetoric and translate it into action. Mouthing pieties about the purity of the process is one thing and conveniently easy politically, which is all they have done to date. Taking responsibility to help fix the genuine problem presented by a system overly dependent on dedications is quite another, much harder and one they have declined to address – until perhaps now.

Changing their approach from symbolism to substance in order to inject more rationality into the state’s fiscal structure concomitant to the operating budget issue currently in front of them would be most beneficial for Louisiana. Otherwise, they defeat that very purpose.

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