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The Proposed Spending Cap Would be a Disaster for the State Budget

Posted on February 22, 2018

Under the guise of “budget reform,” House Republican leaders have made three demands of Gov. John Bel Edwards as a condition of agreeing to replace some of the revenue from temporary taxes that expire on July 1. Most of the attention thus far has focused on the first two – a new website that would track government spending by state and local governments, and a proposed work requirement and out-of-pocket costs for some Medicaid recipients.

But it’s the third demand from House Speaker Taylor Barras that poses the greatest danger to Louisiana’s ability to pay for critical needs in health care, education, public safety and transportation in future years.

Barras is proposing to change the state cap on spending to make it far more restrictive than the current cap. If these changes are added to the state constitution, it could force lawmakers to make hundreds of millions of dollars in unnecessary cuts to services unless they can muster a two-thirds vote to override the cap.

Had the revised cap been in effect in for the 2016-17 budget cycle, the Legislature would have been forced to cut $567 million from that year’s budget unless it could muster a two-thirds vote. For  perspective, that’s more than the combined total general fund dollars spent that year on TOPS ($149 million), mental health ($109 million), juvenile justice services ($120 million) and sheriff’s housing of adult offenders ($123 million).

If the cap had been enacted two years earlier, the cuts would have been slightly less severe but still devastating at $368 million. That could have forced the Legislature to make deep cuts to health care services, higher education, public safety and other vital needs – even if there was money available to pay for them.

Similar budget gimmicks have been tried – and rejected – by many other states, for a simple reason: They don’t work. They do nothing to clean up the tax code or make government run more efficiently. Instead, it turns legislative decision-making over to a flawed and rigid formula, and puts undue power in the hands of a minority of lawmakers.

Background
Louisiana has a
constitutional cap on state spending that dates to the 1990s. The cap gets adjusted each year according to a growth factor that’s based on the average annual percentage change in personal income for the previous three years. If the Legislature wants to spend money above the cap, it can do so with a two-thirds majority in the House and Senate.

Louisiana twice hit the spending cap in the aftermath of Hurricane Katrina, when an influx of hurricane-recovery dollars and a sharp uptick in energy prices made state revenues spike to record levels. Back then, tax revenues grew quickly enough that it soon outpaced the personal income growth, which was based on the three-year calculation. The spending cap kicked in, and allowed for a more robust debate over spending priorities at a time when the state economy was overheated.

At any time it wants, the Legislature can also “rebase” the cap – or set a new spending limit from which future growth will be calculated –  with a two-thirds vote of each chamber. This last happened in 2013, when the Legislature voted unanimously to reduce the base by more than $2.6 billion. There is a proposal to do so again (also proposed by Speaker Barras) in the current special session.

The proposed new cap appears to be modeled after a Taxpayer Bill of Rights (TABOR) approved in 1992 by voters in Colorado. Although Colorado’s TABOR applies to revenue, not spending, it functions in a similar way by placing an arbitrary limit on what can be spent on priorities such as education, public safety and health care services.

Colorado’s TABOR caps the annual growth of state revenue to a formula equal to the sum of the annual percentage increase in inflation and population growth. If the state’s population grows by 2 percent and the inflation rate is 3 percent, then revenues can only grow by 5 percent.  

The change proposed to the cap are even more restrictive than Colorado’s. Under Barras’ House Bill 12, state spending could only grow by a formula that is the average percentage growth of personal income, population, the state revenue forecast and the consumer price index in the Southern states.  

An analysis by the Legislative Fiscal Office shows that if the new spending cap had been in place since the 2009 fiscal year, the average rate of growth under the cap would have been $231 million – which is more than $200 million per year less than the $434.7 million per year of average annual growth. In other words, it would have made the budget crises of the past decade much worse, as two-thirds majorities would have been required to fund needed services in education, health care, public safety and other priorities.

The wrong solution
What’s so bad about limiting spending? Plenty, actually:

-An arbitrary spending cap, which is not backed by any credible economics, limits the choices available to legislators by permanently undermining the ability to make investments in education, transportation and other engines of economic growth.  In short, it would make the budget crises of the past decade a permanent feature of state government.

-In years when the state bumps up against the spending cap, it would be much harder to make the kind of mid-year budget adjustments that now happen routinely and respond to emergencies. Instead of bringing such plans before a monthly meeting of the House-Senate budget committee, it would require a two-thirds majority support from each chamber.

-An arbitrary, restrictive spending cap does nothing to clean up the tax code, make government run more efficiently or set priorities. It simply turns over legislative decision-making to a flawed formula and puts undue power in the hands of a minority of lawmakers.

-The inflation formula proposed in the new cap does not account for the actual cost of providing state services to people in need, such as senior citizens. For example, medical inflation routinely grows faster than overall inflation due to an aging population. While the inflation rate is a good way to measure the cost of goods and services such as food and housing, it does not account for the cost of providing labor-intensive public services. While the price of flat-screen TVs may fall as the economy become more productive, a teacher can only teach so many students at once.

-By making Louisiana’s budget crisis a permanent feature of state government, a lower spending cap could endanger our credit rating. This, in turn, would drive up the cost of important construction projects such as needed roads and bridges.

The onset of legislative term limits means there are very few people in the Legislature today who remember the last time that Louisiana hit its spending cap. But it happened, and the cap worked exactly as intended. There is also nothing wrong with adjusting the cap on occasion, as Speaker Barras is proposing to do. But the politics of the moment should not be an excuse to tamper with an expenditure cap that has stood the test of time.

-Jan Moller

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