The Revenue Estimating Conference  surprised no one by recognizing an additional $346 million in revenue for the 2019 fiscal year – which means the state’s “fiscal cliff” is now $648 million instead of nearly $1 billion. The windfall came largely as a result of the federal tax cut law, which has the effect of raising state income taxes because people will have less money to deduct on their returns. But it still means lawmakers will have to make deep cuts to health care, education and other services unless they agree to replace some of the $1.4 billion in tax revenue that expires on July 1.  Elizabeth Crisp of The Advocate writes:

Thanks to a quirk in how federal taxes impact state taxes in Louisiana, Congress’ recent tax overhaul has given the state’s coffers a boost, lessening the fiscal cliff. The special session collapsed after the House reached an impasse on proposals to plug expiring revenue with new or partially-extended tax hikes. One of the sticking points was the belief among some, particularly House Republicans, who questioned the size of the fiscal cliff. At the time, they said they feared raising taxes more than would be needed to fill the hole.

What’s ahead: The House Appropriations Committee will plug that money into the budget bill on Monday and make other changes before passing the bill to the floor. This will provide an important first look at how House leaders propose to balance the budget without replacement taxes, as GOP leaders are insisting on. Gov. John Bel Edwards laid out a list of priorities for the newly recognized dollars, which includes restoring some cuts to higher education, juvenile justice and substance abuse services. But it still leaves a massive hole in the Medicaid budget, particularly the public-private “partnership” hospitals where post-graduate medical residents and allied health professionals get their training. The AP’s Melinda Deslatte:

Without replacement taxes, the governor said cuts would damage education, health and public safety programs. (House Speaker Taylor) Barras wouldn’t commit Thursday to a second special session, saying he wants to review “what truly is out there in revenue,” both the dollars included in the latest forecast update and other money that could be raised through pending legislation. “There are some members that do feel strongly that maybe a (special) session wouldn’t be necessary and that they could live with the cuts,” he said. But he added that “there’s another large portion of our body” worried about large reductions to spending.

What to expect from federal tax changes

Tuesday is the deadline for Americans to file their federal income taxes. While the sweeping federal tax cut bill took effect Jan. 1, the full effects of the law won’t be felt until next year. There are some things we know for sure. The individual income tax changes are temporary, while the corporate tax changes are permanent. An estimated 13 million fewer people will have health coverage due to the repeal of the ACA’s individual mandate. And younger generations will be forced to shoulder the weight of the growing deficit, which will have to be addressed with future spending cuts or tax increases.  Vox reporter Ella Nilson explores what we can expect from the tax overhaul:

The Republican tax law will cause the national deficit to increase by $1 trillion over the next decade. It will also let individual tax cuts expire after 10 years, meaning taxes on the middle class would eventually go up. Furthermore, some Republicans are advocating for the idea of raising tax rates if the tax bill doesn’t produce enough economic growth to stave off a deficit increase. It’s hard to predict exactly how this would impact everyday Americans, but tax experts can say a few things with certainty: Older, wealthier Americans are going to benefit in the long run, while young Americans who work will be left footing the bill for years to come.

Michael Leachman of the Center on Budget and Policy Priorities notes that Louisiana is among 47 states and the District of Columbia where the richest 1 percent of taxpayers will reap more benefits than the bottom 60 percent.

In the shorter term, many states expect to see a change in revenues due to the new federal tax law. As we’ve noted, states should respond with substantial caution to the possibility of a revenue boost and instead focus on preparing for potential cuts in federal funding for states, as well as the next recession. At the same time, they should consider raising new revenue from corporations and other wealthy taxpayers that just received a large federal tax break, and strengthening investments in education systems, transportation networks, and other public services that support broadly shared prosperity.

Louisiana’s middle class is slowly shrinking

In most states, the middle class is on slowly growing after over a decade of retrenchment. But not in Louisiana, where the percentage of households identified as middle class decreased from 46.4 percent in 2013 to 46 percent in 2016. That’s because Louisiana’s recovery from the recession has been slower than other states, and the fact that Louisiana suffered through an economic downturn caused by declining oil prices that started in summer 2014. On the bright side, median household income increased from $53,615 in 2013 to $54,473 in 2016.  Tim Henderson of Stateline reports:

Chris Edwards, an economist at the libertarian Cato Institute, said the middle class has continued to do well this year because of rising wages and tax cuts for some workers, but at the expense of higher government spending that will come back to haunt it. “My message to the middle class is, ‘Enjoy it while you can,’ because Washington is building up a pile of debt that’s going to eventually land on the middle class by pushing taxes up,” Edwards said. Only Alaska and Hawaii had a larger share of middle-class households in 2016 than in 2000 — and in both cases, the increase was just two-tenths of a percentage point, to about 55 percent.

Budget brief: Medicaid cuts put lives in jeopardy

The state’s Medicaid program, administered by the Louisiana Department of Health (LDH), is the area of spending that would be most deeply cut if the Legislature does not enact revenue raising measures. The executive budget proposes a $656 million cut in state funding for Medicaid, which would trigger the loss of $1.58 billion in federal Medicaid funding and $168 million from other sources. The result is a $2.4 billion cut to a program that serves Louisiana children, people with disabilities, the elderly and people with very low incomes. That’s a reduction of nearly 20 percent compared to current funding levels. Read our latest brief by Policy Director Jeanie Donovan here for more on the fiscal cliff impact on health care.

Number of the Day

$648 million – The new figure for the fiscal cliff, since the Revenue Estimating Committee projects an additional $346 million available for next year’s budget. (Source: The Advocate)