SADOW: Don’t Let Louisiana’s Fiscal Crisis Go To Waste

All right, so relative to predicted recurring revenues and forecast costs for fiscal year 2016 Louisiana now has a $1.6 billion gap that could require hundreds of millions of dollars of cuts to health care and higher education from this year’s baseline. Leaving spending reductions aside for the moment, what on the revenue side could be done to close this?

A number of things could be tried, but the problem is as most of them involve structural reform of Louisiana’s fiscal system and spending proclivities, they deliver not much in the way of short-term relief, with most of that coming further into the future. For example, the motion picture investor tax credit likely would have little earned in FY 2015 that also would get claimed on the tax returns of that span. And any removal of these would require a two-thirds vote in the Legislature, which seems unlikely for almost any of them, given politics, regardless of whether they would have a major impact this upcoming fiscal year.

But the Legislature constitutionally is empowered to suspend laws, by the same vote threshold as what it takes to enact the law, which while to raise a tax is two-thirds, to pass an exception is just a simple majority of the seated membership. Suspensions may last only 60 days after the end of the next regular session, i.e. possibly through Jun. 30, 2016, and do not face a gubernatorial veto. Thus, Gov. Bobby Jindal, oft quoted indicating opposition to any non-neutral tax changes that would have the effect of an overall tax increase, could be bypassed by simple majorities to wipe out temporarily tax exceptions, a mark that seems much more realistic by which to succeed.

So for this strategy to work, exceptions of some significance for the immediate term would have to be suspended, and several candidates suggest themselves. Most obvious is the Earned Income Tax Credit that (as of the latest data) removed $46 million from the treasury. The EITC, which pays people for working a minimal amount, discourages working more and advancing in work capability that outweighs the marginal impact of encouraging the getting of a job, and a more generous federal version already exists.

Lifting the exemption on sales tax to local governments would lift another counterproductive exception. The state enjoys this benefit as well, although it could be argued that if not it would be paying itself anyway. But local governments get this, too, and if they had to pay it this might make them reconsider both whether their own sales tax policies are excessive and whether they truly ought to be spending in certain ways with the subsequent reduction in money they would retain. The entire amount is $211 million; perhaps $50 million of that goes to local governments.

The tax-free income break to state and teacher retirees and to federal pension retirees also deserve dismissal. People in the private sector who have to pay on their pensions or distributions from individual retirement accounts don’t get this advantage – this discrimination multiplied by the fact that government retirees typically receive greater total compensation than private sector workers performing the same tasks. The majority of southern states do not offer this break and together they cost Louisiana $106 million.

Just these four alone would bring in over $200 million extra, with little negative impact to collections. The EITC bonus people receive generates little in sales tax revenues because much of their spending already is exempted through the state’s sales tax break on unprepared food, prescription drugs, and utilities, local governments’ spending is an inefficient way of boosting economic development, and pension monies typically get used in a way to generate sales tax revenue, except a decent portion of the typical spending of a retiree to whom a pension is the main or only source of income (the minority of all such recipients) is on items that qualify for the food/drugs/utilities exemption.

One area that should not be suspended is the exemptions for income taxes. It’s unfair to tax people on income already taken as taxes by another level of government (most of this being federal income taxes, but some by other states). However, the full “excess” item deductibility of federal taxes allowed also as a deduction on state taxes should be investigated and tweaked so that only deductions for those things which potentially enhance state revenues get such treatment.

Also, policy-makers would act unwisely by treating suspensions as an end unto themselves addressing a short-term event. Choosing which ones to jettison temporarily ought to relate to a larger strategy of permanent parings, which if undertaken in the past would not now have led to these difficulties. And they should include a review of dedications to match actual need attached to the dedication is as great as the funds normally expected to flow that way; if not or the need is not one that government crucially should address, the dedication requires loosening if not elimination. Finally, they additionally should include rigorous review of spending and merge in cuts to these with changes made to the revenue side of the ledger. Actually, none of this is new: various legislative panels have looked into these options and continue to do so.

No, given the lackluster economic environment encouraged by the Pres. Barack Obama Administration for the past six years, Louisiana did not prepare itself well for bad fortune that unluckily befell it with a steep decline in oil prices (ironically despite Obama Administration efforts to the contrary, and with Louisiana playing a significant role in its production causing the glut). But now with things as they are, the Obama Administration aphorism about not letting a crisis go to waste should jumpstart fiscal reform efforts. That can begin with temporary suspensions targeted to unproductive uses that when enacted bring immediate relief as part of a larger, longer-term campaign.

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