Most hangovers last a few hours, maybe a day. Or two. That's not the case with Louisiana's fiscal hangover. Former Gov. Bobby Jindal and state lawmakers binged for too long on budgetary gimmicks and corporate giveaways that ultimately gutted higher education, health care, highways and more.
They got by, sort of, by raiding various pools of one-time money to cover recurring annual costs that weren't cut. Now those pools of cash are depleted, and the state has a mountain of bills to pay.
New Commissioner of Administration Jay Dardenne, a Republican, recently described the situation as "shocking" and "more dire than we thought." He wasn't exaggerating: Louisiana has a current deficit of $750 million and a projected budget gap for the next fiscal year (beginning July 1) of $1.9 billion. Last year's projected gap was $1.6 billion. This problem will continue to worsen unless the new governor and lawmakers take significant steps to turn things around.
Jindal left office saying he's proud he "reduced the size of government." What he actually reduced was people's access to key government services such as higher education, health care and good highways. Meanwhile, he increased Louisiana's "structural deficit" (that's how Moody's Investors Service describes our state finances) to nearly $2 billion a year and growing.
That kind of hangover won't go away quickly, or easily. New Gov. John Bel Edwards plans to call a special session next month, shortly after Mardi Gras, to deal both with the short-term and long-term budget mess. The only thing that was certain in the final days of his transition was that "everything is on the table" in terms of possible cures.
This is going to be some bitter medicine.
"We simply cannot cut our way to a balanced budget," Edwards told the New Orleans Chamber of Commerce Dec. 18. "We're going to have to put all options on the table."
In a Dec. 30 editorial, The Advocate put "the T-word" on that table when it noted that "good-government groups reviewing the state's dire budget situation say the incoming administration will be hard pressed to bridge the projected [$1.9 billion] deficit without raising taxes."
Jan Moller, head of the Louisiana Budget Project, a left-leaning think tank, told The Advocate: "I don't see how you get out of this fix without raising revenues. That's a given at this point. The only question is, 'How do you do it?'"
Indeed. What seemed difficult if not untenable in previous years may loom as easy pickin's this go-around: spending cuts (but probably not to higher ed and health care); rolling back certain tax breaks and tax credits; suspending, eliminating or phasing out many sales and income tax exemptions; and "undedicating" state spending on many services.
But even after all that, the state still won't have enough money to cover short- and midterm expenses. Many exemptions and tax breaks are enshrined in the state constitution and cannot be changed without a statewide referendum, which takes time — and a two-thirds vote of the Legislature.
When he spoke to the Chamber, Edwards cited the partial repeal of the Stelly Plan in 2008 (the first year of Jindal's tenure) as a primary cause of the state's troubles. The Stelly Plan, adopted by lawmakers and voters in 2002, raised income taxes on middle- and higher-income taxpayers but exempted basic necessities from state sales taxes. It was revenue neutral in its first year, but in subsequent years it generated hundreds of millions in additional money as the state's economy grew — which was the desired effect. In fact, that's what experts consider good tax policy.
In 2008, when Jindal inherited a $1 billion surplus from former Gov. Kathleen Blanco (and when federal hurricane relief funds still were pouring in), he supported a move to roll back Stelly's income tax hikes while leaving the exemptions in place. The surplus got spent, the federal relief dried up and that decision now costs the state upwards of $800 million a year. Restoring all or part of Stelly is among the items "on the table."
Edwards says he will offer lawmakers a "menu" of options, and to that end he has received many suggestions. State lawmakers in 2014 created the Louisiana Tax Study Group, which issued a comprehensive report with recommendations last March. During the recent statewide elections, other groups weighed in: the Public Affairs Research Council (PAR), the Committee of 100 for Economic Development (C100), and the Louisiana Association of Business and Industry (LABI), to name a few.
The Tax Study Group, because it was created by the Legislature (of which Edwards was a member at the time), has tremendous credibility at the Capitol. The group is led by LSU economist Jim Richardson, who also sits on the four-member Revenue Estimating Conference. Edwards spokesman Richard Carbo told Gambit the governor considers the Tax Study Group report "a starting point for options," but nothing has been ruled out.
The suggestions of PAR, C100 and LABI undoubtedly will have legislative champions, but some of their proposals include revenue measures that ideological conservatives won't embrace. That portends a raucous special session.
PAR for years has untangled Louisiana's most complex issues and is considered a leading nonpartisan reform group. Last April, PAR recommended a laundry list of cuts and potential revenue hikes. They included reducing, eliminating or phasing out certain exemptions, tax credits and budget dedications. Few of those ideas were adopted, but all of them, like the recommendations of the Tax Study Group, are on the table now.
C100 commissioned the Tax Foundation, a nonpartisan national group, to study Louisiana's tax code and suggest changes. The foundation's November report recommended broadening Louisiana's tax base while reducing corporate and personal income tax rates. The report also suggested an administrative overhaul of sales tax audits and collections. In many respects, the C100 report tracks major recommendations of the Tax Study Group.
LABI makes no bones about representing business interests, but most of its 23 recommendations were nonpartisan — and focused on spending, not taxation. LABI endorses the C100 ideas for tax reform and further suggests reducing dedications, making it more difficult to enact new dedications, and injecting greater transparency into the budgeting process.
Since Edwards acknowledges that the Tax Study Group report is a logical "starting point," and since taxes are clearly on the table, that's a good place to look closer. Here are the major recommendations of that report:
Keep the 4 percent state sales tax rate where it is, but gradually reduce or eliminate certain exemptions.
Phasing out some sales tax exemptions is bound to be part of a long-term solution, but immediate suspension of many exemptions looms as a likely "fix" for the short-term deficit. This potentially could generate several hundred million dollars because sales tax exemptions cost the state $1.7 billion. Some are enshrined in the state constitution, but Edwards spokesman Carbo told Gambit that "potential constitutional amendments are on the table."
Consolidate collections and audits of sales taxes.
This long-term reform is popular with the good-government crowd and business interests, but it's politically problematic. In most parishes, the sheriff is the ex-officio tax collector — and sheriffs' budgets are based on tax collections. Moreover, the Louisiana Sheriffs' Association endorsed Edwards right after the Oct. 24 primary. If he's willing to upset sheriffs right out of the gate as governor, it'll be a sign that everything is on the table. There also may be room here for a compromise.
Lower personal income tax rates but eliminate most if not all exemptions.
This, too, is a fave of C100 and others, and it effectively means reinstating the Stelly Plan, with some tweaks. Reverting to some form of Stelly seems destined to be part of both a short-term and long-term strategy, but it won't be easy. Lowering the rates (from the present 2, 4 and 6 percent brackets to 1, 3 and 5 percent brackets) could make this idea more palatable, especially if voters are asked to amend the constitution. C100 offers its own array of options: brackets of 1, 3 and 4.5 percent, or a flat rate of 3.5 percent or 4 percent, depending on which exemptions are eliminated. C100 also suggests tax relief for lower-income individuals to soften the impact of a flat income tax.
Align excise taxes on alcoholic beverages, beer, gasoline, diesel and tobacco with rates in nearby states.
The study suggests raising the 20-cents-a-gallon gasoline tax to 24 cents a gallon — and truly dedicating it to highways. Louisiana already taxes beer about the same as other states, at 32 cents per gallon. However, Louisiana's $2.50-per-gallon tax on liquor and 11-cents-per-gallon tax on wine are well below the national averages. Raising the booze tax is not as easy as it sounds, however. The liquor lobby is among the most powerful at the Capitol. Lawmakers hiked the tobacco tax last spring, but there may be room for another hike if the new revenue is dedicated to health care.
Streamline the corporate income and franchise taxes by lowering rates and reducing exemptions, and reform how corporate income is apportioned for state income taxation.
Just about every entity that has studied corporate income and corporate franchise taxation in Louisiana suggests lowering the rates while broadening the base. C100's study recommended that the change be revenue neutral, then added: "If a net increase or decrease in revenue is desired, the tax rate can be dialed up or down... ."
In addition to considering all those ideas, Edwards will expand Medicaid under the Affordable Care Act. That will provide health insurance to hundreds of thousands of uninsured Louisianans and bring in millions in federal funds annually. Medicaid expenditures eat up a huge chunk of Louisiana's budget, and it's the fastest growing segment of the budget.
"No one wants to raise taxes, but in order for our state to function in the long term, everything truly needs to be on the table." state Rep. Walt Leger III, D-New Orleans
"No one wants to raise taxes, but in order for our state to function in the long term, everything truly needs to be on the table," says state Rep. Walt Leger III, D-New Orleans. Edwards tapped Leger to be House Speaker, but the GOP-led House voted to confirm New Iberia Republican Taylor Barras for the speakership. Leger was voted Speaker Pro Tem unanimously.
"None of this will be easy," Leger adds. "We should see this crisis as an opportunity to have an honest discussion about what services our state ought to provide and how much we are willing to pay for them. Having that discussion is important and healthy, and ultimately I hope it leads to a more honest way of addressing our ongoing fiscal challenges. We have an opportunity to work in a nonpartisan way to do that, and we should not let this opportunity pass."
At the end of the day, Leger says, he does not foresee "a whole bunch of new taxes" but rather a combination of some revenue hikes, lower exemptions and budget cuts. It's also a matter of timing, he says.
"Because of our short-term budget shortfalls and our long-term structural deficits, we need to focus both on how to free up immediate revenue and on the time frame in which new revenue can be collected," Leger says. "Over the last eight months we learned that the timing of revenue collection significantly affects how much revenue actually ends up being collected. There's more to it than just picking a number."
LSU's Richardson, of the tax study group and the Revenue Estimating Conference, agrees with Leger.
"We need cash now," he says. "How do you get cash now? Only a few ways: One is raising the sales tax rate in the short-term, effective in April, which brings money into state coffers immediately. The other way is to bring back Stelly, which would increase withholding on people's payroll checks. That would generate money fairly quickly. Once you do those two, there aren't too many ways to generate money fast enough to pay bills in 2016."
The really bad news, Richardson says, is the short time frame. The current fiscal year ends June 30.
"You can't get $750 million out of [income and sales] taxes in just three months," he says. "It's going to be a very interesting process — to deal with the short-term as well as the long-term problem. They need to fix it so that in four years there are no more budget problems."
It took Louisiana decades to get this deep in the tank. If Edwards and lawmakers can turn things around in a 30-day special session, it will rank among the most miraculous hangover cures in history.