SADOW: Louisiana’s Giant Deficit To Come Ought To Prompt Major Reforms

It’s official: Louisiana’s budgetary quagmire created by an economic shutdown related to the Wuhan coronavirus pandemic is not as bad as expected for this fiscal year but the deficit will be worse for the next fiscal year.

The Revenue Estimating Conference recognized a $123.1 million reduction in general fund revenues, which may be spent on a variety of things, from the last forecast of 13 months ago for this fiscal year and $867.5 million for next year. Another $239.5 million fewer is projected for dedicated funds, which go to specific purposes, for this year and $165.1 million fewer for the upcoming year.

A couple of weeks ago, I pegged the fiscal year 2020 downdraft at around $550 million, but Republican Pres. Donald Trump and a Republican-led Congress salvaged matters. Their 2017 legislation that cut federal income taxes meant Louisianans deducted lower federal tax payments against their state income taxes, resulting in higher collections than forecast even into 2019 of over $200 million. As well, the increased number unemployment insurance payments, which are taxable, with as much as 15 percent of the workforce drawing these and supercharged by the across-the-board federal $600 monthly bonus through July also will boost these collections and reduce what would otherwise be an even larger deficit to come.

Unfortunately, my initial estimate for FY 2021 of a $623 million deficit proved way too optimistic in terms of recovery of economic activity, according to state economists. And the continuing delayed response by Democrat Gov. John Bel Edwards to reopening parts of the state’s economy may make even their billion-plus dollar reduction forecast too rosy.

Keep in mind that this addresses only revenues, not expenses. Mainly Medicaid-induced expenditures additionally will hit the budget, with those I saw rising by $72 million for this fiscal year, and by $134 million in FY 2021.

This current budget cycle’s deficit the state probably can manage. It has $135 million at its disposal from the Budget Stabilization Fund, which wipes out the general fund deficit. The dedication shortfall largely will hit specific activities or in many cases are largely discretionary, such as the Transportation Trust Fund to build roads or the Support Education in Louisiana First Fund that finances potential education salary increases. Thus, the state may try to save the BSF money for application in FY 2021, given the magnitude of that deficit, and use budget cuts throughout state government, which across the board (they wouldn’t be) is 1.22 percent (although in just 45 days, making it more like a 10 percent hit).

Next year’s gap could grow. Various tax relief bills working their way through the Legislature would forgo tens of millions more dollars, and Republican Treasury Secretary John Schroder and legislative leaders already have agreed the state should not dip into the unclaimed property fund other than what statute allows for next year.

The prospect of genuine fiscal reform shines as the only bright spot to this gloomy picture. With an 8 percent haircut to non-self-generated state-sourced revenues, this might finally focus policy-makers on dumping unproductive tax credits, flattening and broadening tax rates, loosening many dedications, and cutting state aid to local governments while giving them enhanced abilities to raise select revenues such as through lowering the homestead exemption.

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