SADOW: Louisiana’s Budget Is Going To Need Some Serious Cutting

As the physical health of Louisianans remains threatened, the state’s current fiscal health continues to deteriorate, with more damage coming as a result of extending by Democrat Gov. John Bel Edwards measures that effectively close many businesses and dampen commerce now through the end of April.

To review the condition of the state financially prior to the first Edwards proclamation that attenuated business activity, economists had predicted on the order of $170 to $236 million greater revenues for fiscal year 2020, and for FY 2021 of $103 million. The orders will have put a halt to some business activities for at least one-eighth of the year. Essentially, five things are affected: income taxes, sales taxes, gaming taxes, other taxes, and severance/petroleum taxes and their externalities.

Some, like casino operations and video poker, essentially are shut down entirely for the entire period. Others like sales tax and income tax face some shrinkage because commerce has declined and idled workers are drawing no income, as is the case for shuttered business. A depressed economy somewhat affects oil prices by reducing demand, but other exogenous factors also play out that will depress the price. The state estimated around $59 a barrel on average for FY 2020 and $60 for FY 2021.

Legislative fiscal officials use a rule of thumb to determine how variance in oil prices affect the state’s budget, anywhere from $10 million to $12 million per change in one dollar per barrel for the year. Assuming a price averaging $25 the rest of the way for FY 2020, that means a maximum hit of $136 million. This wipes out the benefit from a potential maximum Budget Stabilization Fund withdrawal of $135 million, which then cannot be used for FY 2021.

Turning to the reduction in sales taxes independently of that triggered by the oil price decline, let’s assume 70 percent activity for the 45 days and then a month at 85 percent activity. That’s the equivalent of five percent lost annually, and in terms of sales revenues that means a loss (using last year’s data) of $174 million. There goes the presumed FY 2020 surplus.

From here on out everything is deficit. Cross off almost all gaming taxes outside of the lottery for an eighth of a year, so that’s another $88 million. Other taxes that go directly to the state, mainly tobacco and alcohol (as does fuel, although only five-eighths go to current operations), using the same 95 percent metric, would decline in revenue about $40 million.

Income taxes are the trickiest, for periodic filing paid much of the liability for the year, but everybody not part of that won’t have to pay up until FY 2021, and there’s the haircut as well. Last year’s data can provide some indication as to the damage.

The bad news is on a monthly basis April, December, and May are the biggest months for corporations (income and franchise) and some months, because of tax credits and carry forward of net operating losses, have negative intake. In fact, April and May represented in FY 2019 40 percent of all gathered funds. Outside those months, the average coming in is about $40 million, so consider anything above that – $235 million – kicked into FY 2021 and another $4 million lost from inactivity.

It’s smoother for individuals (including fiduciary filings), but April and May still come in above average. Past the monthly average of $288 million excepting the two months, the 5 percent loss of that is $29 million and then $284 million moves forward.

The total is stunningly high. Although $519 million of this becomes recognized in FY 2021, assuming use of any presumed surplus and all allowed use of the BSF, Louisiana will be short $680 million for FY 2020.

Perhaps officials can finesse the $519 million in income taxes due 15 days after the start of FY 2021. A number of strategies, such as delaying certain payments to state funds, contractors, and employees, could mitigate that. Or, something like a shutdown of government as currently going for the month of July (the French do it every year) could do the trick.

If this comes off, then of more concern $161 million will go missing this fiscal year. If cost-saving measures commenced on Apr. 20, that’s still a 2.9 percent cut across all current operations. Brace yourselves: cuts of 3 percent or more across Louisiana state government are on the doorstep and inevitable through June.

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