Louisiana lawmakers are facing a $1.6 billion budget shortfall that threatens the state’s ability to provide basic services like health care, education and public safety. Here are some common questions about the state’s budget crisis, how we got here and some possible solutions:
Is there a difference between the “shortfall” and the “fiscal cliff”?
Yes. The budget shortfall is the difference between the recurring tax revenue the state expects to collect and the cost of continuing all current government operations in the upcoming fiscal year, plus inflation. The budget shortfall for FY19 is $1.6 billion. By FY22, it will be almost $1.9 billion. The “fiscal cliff” refers to the expiration, on July 1, of temporary taxes and tax-credit rollbacks that the Legislature approved in 2015 and 2016. The temporary taxes total $1.38 billion, but the fiscal cliff is smaller – about $1 billion – because some year-over-year revenues have increased. Gov. John Bel Edwards has said he wants to replace about $1 billion in expiring revenue. So even if the governor gets everything he wants from the Legislature, there will still be cuts to the budget and agencies will need to become more efficient.
Why all the focus on taxes? Shouldn’t legislators look to cut spending as well?
Louisiana’s state government spending has been studied to death since the start of the state’s structural budget problems in 2009. The reports are online for anyone to read. The Commission on Government Streamlining produced 238 recommendations, many of which were implemented. A legislative commission studied higher education governance. The Revenue Study Commission looked at all the spending that occurs through the tax code. And when those studies weren’t enough, the state paid $7 million to the consulting firm of Alvarez & Marsal to produce the 425-page Government Efficiencies Management Support study. Many of these recommendations were implemented and are still in effect, while others were rejected.
What about statutory dedications? Why don’t we look there for cuts?
It’s true that a lot of money is locked up, and there’s nothing wrong with looking at these dollars. But it’s not a panacea. A lot of the money is truly off-limits, such as the money that goes to debt service or pensions (a contractual obligation). Other dedications are funded by specific taxes, such as gasoline taxes that go into the Transportation Trust Fund. And some general fund spending is locked away by the state constitution because legislators – and the people they represent – believe it is important enough that it shouldn’t be cut. The largest constitutional dedication is the Minimum Foundation Program that pays for public K-12 education and costs nearly $3.5 billion each year. The Legislative Auditor took an in-depth look at this issue in 2016 that can be found here.
How will the recent federal tax cut affect Louisiana’s budget?
The recent tax cut bill will reduce federal revenues by an estimated $1.5 trillion over a decade. Many Louisianians, particularly the very wealthy, will see a reduction in their federal tax bill. And that means they will pay more state income tax because they will have less to deduct on their state returns. Louisiana is one of only three states that allow full deductibility of federal income taxes, which means our taxes fluctuate depending on events in Washington. The latest estimate from the Legislative Fiscal Office is that it will bring in $302 million in FY 18-19. This will not be nearly enough to solve the fiscal cliff, and these extra revenues are temporary in nature as the federal income tax cut for individual filers is set to expire after 2025.
Is Medicaid expansion responsible for the fiscal cliff?
No. In fact, it’s helping. More than 457,000 low-income Louisianans have gained coverage since the state expanded Medicaid to include adults below 138 percent of the federal poverty level. The federal government is picking up the vast majority of the costs – 95 percent – compared to 62 percent of regular Medicaid. The state’s share, meanwhile, is being covered by dedicated pots of money – an assessment on hospitals, and an insurance premium tax. There is no “regular” general fund money going to support Medicaid expansion. In fact, the state is saving money on this deal.
If the state were to take away this coverage, some of the taxes that support it would go away as well. Meanwhile, the people who lost coverage would still get sick. And they would still get care. But instead of being treated at the provider of their choice, they would be forced into the charity hospital system, where the state would be responsible for 38 percent of the cost.