One of the issues that keeps me awake at night is the fragile economic condition Louisiana has been in, and will certainly continue to be in for the foreseeable future. Due in large part to mismanaged budgets and a lack of economic reforms for the past decade, coupled with the debilitating budgetary “gut punch” of CV-19, Louisiana’s economy is left hanging by a thread surviving only by a federal injection of cash soon to hit our treasury.
The $1.8 Billion in federal assistance, which was obtained largely by Senators Cassidy and Kennedy during the CARE Act negotiations, is the only thing keeping Louisiana from going bankrupt like Puerto Rico did a few years ago. However, what is unclear is whether this 1.8 billion will even be enough to save Louisiana’s dire financial situation. Once the stay-at-home order is lifted in the coming weeks, it is doubtful Louisianans will have much of an economy to return to.
This issue is horrific in scope, yet I hear nothing from the Governor in any of his press conferences about our economic health other than a perfunctory announcement of a recovery task force full of his supporters on Thursday. It’s similar to chewing gum and walking at the same time. This governor is focused on the pandemic and our personal health, as he needs to be, but unlike the White House press conferences, where our economic health is also front and center, there is nearly no mention of economic policy in any of Governor Edwards’ briefings. The governor may be chewing gum, but he ain’t walking at the same time. Louisiana’s citizens deserve to understand what state we will return to once we leave our homes and return to normalcy post CV-19. The picture isn’t good and here is just a brief preview.
Overreliance on Sales Taxes
To start, roughly 58% of Louisiana’s revenue is comprised of sales taxes; one of the highest shares as a percent to revenue for a budget in the country. Louisiana and its government have relied more and more on increasing the sales tax to plug economic budget shortfalls in the past. That effort has grown considerably under JBE’s leadership and is what puts us in the greatest danger today. Of the nearly $11 billion in revenue Louisiana realizes on an annual basis, $6.4 billion of that comes from sales taxes. Given that the state is on a current “stay at home order” and less shopping is occurring at retail points of sale, the vulnerability of Louisiana’s public fisc is obvious.
Google is now publishing its tracking tool of citizens’ mobility and their report shows that in the month of March there was a 45% drop in visits to retail shops. Granted, this is only one platform to measure a drop in shopping, and isn’t all inclusive of the real potential danger our budget faces, but it is at least more information that what we are getting out of the Governor’s administration on the economic hole this pandemic is creating. If this trend continues through the stay at home order at the end of April, Louisiana could be facing upwards of a billion dollar drop in revenue over this year because of our over reliance on a tax that isn’t compatible with a stay-at-home order. That is an amount nearly equal to the revenue short-fall crisis of four years ago that ultimately required four years and seven special sessions to (ineffectively) resolve.
Income Taxes Coupled with High Unemployment
Another major source of revenue for Louisiana’s budget, nearly 32% of budget revenue, is our income tax. About $3 billion is generated to fund our government through this tax. A recent report filed by WDSU in New Orleans highlights another worrisome issue that Louisiana and the state legislature will have to face once they reconvene. Nearly 100,000 workers filed for unemployment in Louisiana in March and over 350,000 since the beginning of the stay-at-home order. In comparison, in March of 2019 only about 1,700 citizens filed for unemployment benefits. To put those numbers into even greater perspective this represents a double-figure unemployment rate which won’t likely abate immediately when the lockdown is over. Louisiana could be facing a death blow of unemployment in the neighborhood of 20% once the stay at home order is lifted.
The hit to the revenue created by the income tax will be dramatic and prolonged. A drag of this sorts on our economy will have lasting effects to include compounding the aforementioned sales tax revenue reduction, but also in areas of increased crime (an unfortunate byproduct of high unemployment), lost population, homelessness…you name it. High unemployment reverberates throughout all aspects of our economy. Specifically, Louisiana could be facing upwards of an additional $300 million in lost revenue created by this pandemic immediately in the form of lost income tax revenue.
For every dollar drop in the price of oil Louisiana’s budget loses about $11 million to fund our government. On average, Louisiana’s budget is based on an average price of oil around $56 per barrel, though this year’s Revenue Estimating Committee forecast was made with an expectation of an even higher price. With the ongoing international disputes between OPEC +1 (OPEC + Russia) the price of oil has plummeted creating a negative drain on our budget. While in the past few days we have seen a sharp rally in that price, the average monthly price per barrel was around $32 per barrel in March and has now dipped to roughly $25 to begin April. Even with the recent rally we are a long way away from ever seeing $56 per barrel again. The $56 a barrel we budget for will need to drop, immensely. At $40 a barrel, which unfortunately may be a conservative average at this point, Louisiana stands to lose nearly 200 million more dollars in revenue this year.
Using the bar napkin math scribbled above, Louisiana and its citizens should be prepared for a massive drop in revenue this year and the years moving forward. While the 1.8 billion obtained from the Federal government will help, it is only a one-time payment and may not even be enough to pull us out this year alone. Next year that $1.8 billion won’t come, and our economic ship of state will still be rudderless in the wake created by this pandemic. For the next several years Louisiana needs to be prepared for some very bad economic and budgetary choices. Something Governor Edwards has made no mention of.
The mistakes our government made four years ago by increasing taxes to pay for shortfalls must not be repeated. Clearly an overreliance on taxes that are subject to the whims of epidemiological and geopolitical events is no way to run a government. Similarly, balancing our budget with sales taxes and then issuing “stay at home” orders is also no way to proceed moving forward either. We need to learn from our past mistakes lest we repeat them and enact budgetary, legal and tax reforms.
What is needed is a new path forward for our government and budget. We need to issue a constitutional convention to help free up dedicated funds, create a flat tax, repeal the deduction for federal taxes, and eliminate excess itemized deductions. All of these could provide across-the-board relief through a lower and ultimately a fairer tax system that won’t lend us to vulnerabilities of the above-mentioned issues. Equally important to the reforms above is that legislators need to push back on any numbers produced by the revenue estimating conference in the coming days. They should view those budgetary figures with extreme skepticism and reduce that figure by a large sum. Then, as Representative Edmonds has proposed the last several legislative sessions, only budget 98% of that number.
All the above will help but what is most needed during the coming weeks is better leadership. The governor needs to start communicating about this looming economic depression. I am sympathetic to the sensitivity of talking economics during a pandemic, but the federal government is addressing both the nation’s personal and economic health and Louisiana should be too. This is a multi-front war we are fighting and as the adage states, “In war there are no winners or losers, only survivors.” So, what world will the citizens of Louisiana awaken to once this pandemic war is over? To date, the picture is not good, and Governor Edwards needs to start communicating this so our citizens so that we can start formulating better policy decisions moving forward.
Kirk Williamson is a PhD. Student, Naval Officer and business owner in New Orleans.