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Revenue Estimating Conference: LBP Breaks Down the Numbers

Posted on April 26, 2012

By Jan Moller

The sullen look on Rep. Jim Fannin’s face on Tuesday evening told the story better than the numbers ever could.

Fannin, the chairman of the budget-writing House Appropriations Committee, offered little except shoulder shrugs and gallows humor after the Revenue Estimating Conference finished revising the state’s budget forecast.

That’s because the figures were startling: Tax revenues for the current year are falling $210 million short of expectations. Next year’s forecast is $304 million short of earlier predictions. That’s $514 million in proposed spending that lawmakers have to cut before they adjourn June 4, starting on Tuesday when Fannin’s committee takes its turn.

And that’s not counting additional reductions that might be needed if lawmakers refuse to go along with Gov. Bobby Jindal’s proposed overhaul of the state retirement plans. At least $120 million is riding on those bills.

In a budget where almost 86 percent of discretionary general-fund money goes to education and health-care programs, it’s no mystery where the biggest cuts are likely to fall. Hospitals, doctors, college campuses and safety-net services for the elderly and disabled are almost certain to feel the pinch in the weeks ahead. Practically every corner of state government is likely to be affected.

These cuts follow years of prior reductions, as the state has continually taken in less money than economists forecast. It has become a rite of spring for the Legislature to craft a bare-bones budget amid massive shortfalls. And it has become a Christmas tradition for the governor to make mid-year cuts as revenue projections come up short.

So how did we get here? The main culprit, policymakers were told, is the sluggish economy. “We’ve just sort of stalled out” halfway through the fiscal year, Legislative Fiscal Office chief economist Greg Albrecht told the forecasting panel.

But economic sluggishness only tells part of the story. The rest has to do with a series of self-inflicted wounds  – lucrative tax breaks for large corporations, moviemakers and the well-to-do, which have eroded Louisiana’s tax base and forced deep cuts to critical services.

Just look at what’s become of the “big four” sources of state revenue – sales taxes, individual income taxes, corporate income taxes and severance taxes from oil and gas – since Gov. Bobby Jindal took office in January 2008.

While individual income-tax collections are the main culprit in the most recent downgrade (coming in $446 million below expectations over  the next 14 months), the most dramatic revenue decline has been on the corporate side. And the two areas that have mostly been spared from new tax breaks – sales and severance taxes – have proved to be the most stable.

The following chart shows what’s happened to the Big Four, on a percentage basis, over the last four years: 

In 2007-08, companies paid $939.7 million into the state treasury (down slightly from the peak of  $1.05 billion the previous year). In the current fiscal year, corporate taxes are expected to bring in $141 million. That’s a drop of 85 percent in four years.

Let’s compare that to the other main revenue drivers.

Sales taxes —an excellent barometer of general economic health, since it reflects how much consumers are spending—brought in almost $2.9 billion in FY 2008. Two years later, when overall state revenues were at low ebb, sales taxes had dropped by 17.5 percent to $2.34 billion. This year they are expected to bring in $2.6 billion.

Overall, sales taxes are down almost 8 percent from their post-Katrina peak—not great, but not horrible either.

Personal income taxes are down too. During the depths of the recession in 2009-10 they were off more than 30 percent from their peak. But they have since rebounded somewhat. With the latest disappointing news, collections this year are 21.5 percent lower than the year Jindal took office.

Severance taxes—the money paid on resource extraction—skyrocketed during the run-up in oil prices during 2007-08, when oil peaked at $140 per barrel. When oil prices fell, so did severance taxes, by roughly 30 percent. But they have since held fairly steady, even though the state is collecting virtually nothing from the natural gas boom in the Haynesville Shale thanks to a lucrative, two-year exemption on severance taxes.

It is no mystery why corporations are paying so much less: Legislators have continued to grant rebates, credits and other exemptions at a furious rate, even as they cut money from the critical programs that are the building blocks of a successful and sustainable economy.

To be sure, this did not begin under the present administration. In 2007-08, Louisiana was already losing 57 cents of every corporate tax dollar to various tax breaks. But the pace has accelerated since then, to the point where companies are now excused from 88 cents of every dollar they owe the state.

The following chart shows the growth of corporate tax exemptions over the last four years:

 

In many cases, these costly tax breaks accrue almost exclusively to a small group of people and companies. As the Legislative Auditor reported earlier this year, the vast majority of certain tax breaks go to five or fewer entities. For example, of the $20.7 million the state paid out in “motion picture investor” tax credits in 2009, 78 percent  – $16.1 million—went to just five entities.

There is a better way than the “cuts-only” approach advocated by the current administration, which has had devastating effects on public education and other vital services. It involves a balanced approach that includes new revenues alongside prudent spending cuts.

But even before that, the Legislature should conduct a thorough review of the multitude of tax breaks and rebates that have been granted in recent years and have eroded our tax base. Rep. Katrina Jackson of Monroe has a bill that would do just that—House Bill 1104. It passed the House unanimously this week and is up for review in the Senate.

It won’t solve Louisiana’s budget problems. But as legislators are about to embark on another round of deep cuts to vital services, it’s a start.

 

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Appendix: The following charts show how the “Big Four” revenue sources have fared the past five years:

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