by Steve Spires and Jan Moller
The Louisiana Legislature starts its 2015 session this week amid a historic budget crisis that was years in the making. Louisiana’s constitution requires a balanced budget, yet the projected gap next year between tax revenues and expenses stands at $1.6 billion. Unless this deficit is plugged in a thoughtful manner that includes new revenues, the result could be deep cuts to critical state investments in education, health care, infrastructure and public safety.
Unlike the natural disasters that Louisiana has suffered through over the past decade, this current crisis is mostly man-made. It was caused by massive income-tax cuts (repeal of the Stelly Plan in 2007 and 2008), the uncontrolled growth of corporate incentive programs, and the decision by policymakers to rely on temporary measures to balance the budget rather than confront underlying structural problems.
But the “quick fix” approach to Louisiana’s budget problems cannot continue. What’s needed now is a careful and nuanced examination of the way Louisiana taxes its people and corporations and distributes the revenue. As legislators search for solutions, they should remember that the budget is not a collection of numbers. It’s a statement of priorities, a moral document that tells citizens what matters most. And in a state with high rates of poverty and low rates of educational attainment, the top priority should be to give struggling families the tools they need to reach the middle class and beyond.
Louisiana’s financial problems are too big to fix in an eight-week session. Next year a new governor, with newly elected legislators, will tackle the problem with fresh eyes. But the upcoming session presents an opportunity to start repairing the structural problems that have led us to this point. And that will only happen if legislators are willing to raise new revenue and cast off the strict ideological constraints of the current administration. Without new revenue, the budget problems that have plagued Louisiana the last seven years will continue.
Legislators filed 1,047 bills in advance of the session, including hundreds that propose significant changes to the state tax structure. Below is an overview of some of the main topics LBP will be tracking in the weeks ahead.
Protecting and enhancing the EITC
Since it was created in 1975, the Earned Income Tax Credit (EITC) has been one of the government’s most effective tools for lifting families above the poverty line and giving children a better chance to succeed in life. Unlike many tax credits that have never been thoroughly studied, the evidence is clear that the EITC encourages low-income adults to work and leads to stronger school performance and higher lifetime earnings among children.
Louisiana is one of two-dozen states that have an earned income credit as part of its state tax code. At just 3.5 percent of the federal credit, Louisiana’s state credit is the lowest in the country.
But some legislators are proposing to reduce the credit even farther in a misguided attempt to save some money in the budget. Rather than hurt working families by cutting the EITC, legislators should look at doubling the credit. House Bill 70 by Rep. Walt Leger of New Orleans would do just that, which would translate into increased take-home pay for nearly half a million Louisiana households.
On the other hand, reducing this credit would be a step back for working families and, especially, children. It also would hurt local economies that benefit from the increased spending on basics like food, rent and clothing that families buy with their refunds.
Enterprise Zones and higher education
Louisiana’s Enterprise Zone program was started with the best of intentions – to give companies an incentive to create jobs in impoverished areas. But over the years, the Legislature has changed the program’s rules in ways that strayed from its original purpose. Today Louisiana is one of the few states that pay subsidies to hotels, restaurants and retail stores, even if they aren’t located in a low-income area. Economists agree this isn’t an effective way to grow the economy, because new establishments don’t create additional demand, they just take away customers and jobs from existing companies—which means the Enterprise Zone program could actually be hurting small businesses.
Several bills proposed for the upcoming session would remove these industries from the program, while other bills go further and also remove construction, health care , and rental and leasing companies, which similarly do not create additional demand for services or new jobs. Eliminating these subsidies could save taxpayers more than $24 million per year without any harm to the state economy.
Any savings from reforming the Enterprise Zone program should be reinvested in the low-income communities that the program was originally meant to serve. Rep. Ted James has proposed House Bill 739 to do just that, by using the EZ savings to fund “Opportunity Grants” for low-income college students. Investing more resources that allow low-income students to afford college at a time when Louisiana is facing a shortage of skilled workers is essential – even in years when the budget is out of balance.
Early care and education
Of all the ways Louisiana spends money, none has a greater return on investment than in early care and education. Study after study has shown that money invested in high-quality care and education for children birth to age five pays dividends throughout a person’s life, making them better prepared for school, more likely to graduate from high school and college, and less likely to end up in the criminal justice system.A dollar invested today in a child 0-3 from an at-risk family can produce up to $17 in long-term savings to the state.
A dollar invested today in a child 0-3 from an at-risk family can produce up to $17 in long-term savings to the state.
In 2012 the Legislature recognized that, while Louisiana does a relatively good job of serving 4-year-olds in preschool through its LA-4 program, the system for younger children is fragmented, uneven in quality and grossly underfunded. Act 3 was an attempt to overhaul the current system by creating uniform standards, a new grading system and other reforms to ensure that every child enters kindergarten ready to learn.
But the promise of this new law cannot be realized without adequate state support. And those investments have been declining in Louisiana in recent years. The state currently spends ZERO general-fund dollars on child-care assistance for children age 0-3.
A recent study by the Board of Elementary and Secondary Education found that it would cost $80 million to ensure that every at-risk child in Louisiana has access to preschool, and upgrading quality and affordability for the families of 12,000 children 0-3 currently being served through child care subsidies.
This money, which is just a down payment on what’s really needed, was not included in Gov. Bobby Jindal’s budget request.
Stronger cigarette tax
Louisiana has the third-lowest cigarette tax in the country, at 36 cents per pack, and at least eight legislators have filed bills to raise it by various amounts. The most promising of these is House Bill 119 by Rep. Harold Ritchie, which would raise Louisiana’s tax by $1.18 a pack to the national average of $1.54. The bill would raise $240 million in revenue next year, but more importantly, would encourage 43,400 smokers to quit and prevent 34,600 teens from becoming smokers in the first place, saving 22,300 lives.
Other bills have been filed to increase the cigarette tax by smaller amounts, 72 and 32 cents a pack. While legislators may be tempted to support these bills to increase revenue, small increases have not been shown to improve public health or reduce teen smoking. If legislators want to raise revenue, generate long-term health care budget savings and reduce the number of smoking-related deaths, they should look to raise the tax by at least $1 per pack or more.
For additional details about the health and financial benefits of raising tobacco taxes, click here for LBP’s report, “Stronger Cigarette Tax = Healthier Louisiana.”
Film subsidy reform
Louisiana taxpayers have spent more than $1.5 billion over the past decade subsidizing film and TV production. Various independent studies over the years have given different estimates of the industry’s fiscal impact, yet they have one thing in common: All have found that each dollar the state spends to attract film producers produces pennies in return to taxpayers. The most recent study also found that the jobs numbers that industry boosters like to claim are inflated, because as much as 25 percent of subsidies go to pay millionaire actors and directors who don’t live in Louisiana or spend much of their money here. Subsidizing the salaries of out-of-state actors does not boost Louisiana’s economy; the money just goes out the door to California.
More than two-dozen bills have been filed that attempt to reform the film program, reflecting a growing understanding among policymakers that the status quo is unacceptable. While some of these proposed tweaks are non-controversial—for example, improving audit procedures to prevent fraud and requiring tax withholding from actors and directors—the real issue facing legislators is controlling the cost of the program.
Industry supporters have endorsed Senate Bills 96 and 104 by Sen. J.P. Morrell of New Orleans to establish $300 million caps (one for the amount of credits certified and the other for the amount claimed by taxpayers in a given year), with any unused portion adding to the cap the next year. This would give taxpayers no protection and do nothing to actually control costs considering the program’s most expensive year came in around $250 million. Other bills have proposed more meaningful caps of $50 million, $100 million, $150 million, $194 million, $200 million and $208 million. Rep. Lance Harris has even proposed ending the program at the end of 2018 and Sen. Jack Donahue has proposed a 2021 sunset. House Bill 633 by Rep. Ted James goes a long way to improving the program’s effectiveness and includes a reasonable $150 million cap—the ten-year average.
Regardless of any other bills that pass this session impacting the movie program, without a meaningful cap that actually controls cost there will be no real reform
Inventory tax and local governments
Gov. Bobby Jindal’s executive budget proposes to save $526 million by turning 12 refundable tax credits into nonrefundable credits. The biggest piece of the plan, accounting for some $377 million, involves reducing a dollar-for-dollar state credit that reimburses businesses for property taxes paid on their inventory at the local level. But business groups are strongly opposed to the plan, which does not appear to have enough support to pass the Legislature.
If legislators don’t agree to the tax credit plan, it could lead to much more severe cuts to health care and higher education programs than what the governor has proposed in his budget. College leaders are warning that some campuses might have to close, while other schools would be forced to eliminate degree programs. Health care programs that serve vulnerable families could be also face drastic cuts.
As an alternative, some legislators have proposed a constitutional amendment that wipes out the inventory tax altogether. This would save the state money without raising taxes on businesses. But it also would create its own set of problems by depriving parish governments of $450 million – money that currently supports K-12 schools, police protection and other vital services.
To avoid budget cuts at the local level, Rep. Julie Stokes has a plan to send the money from higher taxes on cigarettes and alcohol to parish governments to make up for the lost inventory taxes.
It is unclear if this will replace all the money that parishes get from inventory taxes. But it also is problematic in the long run to replace inventory taxes with revenues from tobacco and alcohol taxes that are expected to decline over time.
Another potential solution involves modifying industrial tax exemptions, which are state-granted property tax breaks that affect local governments’ tax base, to give parishes more options for replacing the lost inventory taxes. Other legislators are hoping that sales taxes on Internet purchases could help fill the hole.
None of these plans can be dismissed outright when the stakes are so high for health care and higher education programs. But all of them have flaws. And legislators should not limit themselves to only considering plans that meet the governor’s misguided requirement that all tax proposals be “revenue neutral” from the state’s perspective.
While there is widespread agreement that the inventory tax is outdated and needs to be reformed, any move to phase out or eliminate the tax must be paired with a plan that avoids outsourcing the state’s budget problems to the parish level.