All of the candidates for office have promised to come to Baton Rouge and “fix” the problems with the budget. Details on how best to do so have not been fleshed out to voters, yet, that hasn’t stopped the promises of “real change” from being strongly delivered across the state.
Most voters want to believe in the message, though they seem skeptical that “real change” is a-coming. They sift through the campaign speak, desperately looking for factual details about the problems plaguing Louisiana’s budget, left unsure as to the best solutions to embrace.
Last session, a similar game played out. Rather than confront the challenges we face head on, state leaders used the more poll-tested approach and tossed around terms like “corporate welfare” as the main contributor to our chronic deficits, paving the way for “revenue neutral” tax increases to come in and save the day.
As a result, the Legislature relied on tax increases for employers of all sizes on fundamental economic items like inventory, electricity and debt as the primary mechanism to balance the current state budget. That approach was hastily designed, poorly received, the wrong medicine for a vulnerable economy and, ironically, quite ineffective in solving the recurring deficit threat.
Before long, we will enter a new year with a newly-elected set of leaders. If we truly hope for a different result this time, it is critical to understand why we are in a chronic deficit posture before we even begin to review proposals to help stabilize that trend. Our government deficits can be addressed without creating new ones in the private sector.
Last week, LABI released the first installment in a new research series developed to help the public better understand the complexities of the Louisiana state budget.
“Budget Basics No. 1 – Understanding the State Budget Deficit” consists of 14 easy-to-understand charts accompanied by all of the supporting data and brief descriptions one needs to get up to speed on the challenge at hand.
You can find this research at www.labi.org/budget-basics. In future installments of “‘Budget Basics,”’ LABI will offer research-based solutions to the state’s budget challenges that will encourage both smarter government and a stronger economy.
Budget Basics explores all of the facts, not just the convenient ones. There is no single cause for our governmental deficits, but rather, a tangled web of contributing factors that fall within three major categories: revenue, spending and budget structure.
The Louisiana state budget has grown by 44 percent since 2005. Contrast this figure with the state’s Gross Domestic Product, which grew 25 percent. While the state budget peaked in Fiscal Year 2008 in the aftermath of Hurricanes Katrina and Rita, short-term fixes have essentially maintained the size of state government from Fiscal Year 2011 until the current year.
From a revenue perspective, state government collections dropped dramatically due to three notable events that collided in 2008 and 2009: 1) the end of temporary economic growth and federal recovery funds following Hurricanes Katrina and Rita; 2) the onset of the national recession; and 3) large reductions in tax receipts due to the reversal of “the Stelly plan.” Personal income tax collections alone dropped more than $1 billion between Fiscal Year 2008 and Fiscal Year 2010. Corporate income and franchise tax revenues also dropped $400 million during this period.
In addition, a combination of factors are at play for the growth in tax exemptions, which totaled $7.7 billion in Fiscal Year 2014. Sales tax exemptions and individual tax exemptions are the most widely utilized of all revenue categories, totaling roughly $5 billion and representing more than two-thirds of all tax exemptions. Individual tax exemptions grew more than 100 percent over the past five years, while corporate tax exemptions grew 27 percent.
Despite the decline in revenue after 2008, the amount of taxes, licenses, and fees collected by Louisiana state government are on the rise and are projected to increase over the next five years, even as state economists predict more deficits as well.
That brings us to the next contributor to the deficit:spending. In the years when tax collections declined, state government spending did not decrease proportionally. Instead, temporary mechanisms and stop-gap measures were taken to generally maintain the size and services of state government.
Louisiana spends an estimated $5,577 per person every year, ranking No. 16 nationally according to the U.S. Census Bureau. Louisiana’s local government also spends an average of $4,931 per person every year, ranking No. 13 nationally. Taken together, Louisiana’s state and local government spends an amount equivalent to roughly 20 percent of the state’s GDP every year.
Today, government spending is growing faster than state revenues. Expenditure growth between Fiscal Year 2016 and 2017 is projected to be nearly 14 percent while revenue growth will be less than 5 percent. The delta is the state deficit projected for next year: $713 million.
Compounding the recurring deficit is the budget structure itself, specifically the fact that most of Louisiana’s state budget is considered “off-limits” to annual review or reductions. The Constitution requires certain spending ($6 billion). State agencies charge fees for services ($2.3 billion). Nearly 400 dedications of revenue exist in state law and the Constitution ($3.8 billion). “Budget Basics No. 2” will focus on all three forms of locked-up state funding, which total roughly two-thirds of the entire state budget.
If we want next session to end with a different result, all the facts need to be put on the table. The people of this state deserve to know the truth.
Our state budget is a complex document to say the least, but to “fix” it we need to get back to the basics. You can’t get to the basics without looking at all of the facts. The facts are that we have not cut spending at a rate that matches the reduction in revenue collections and the dollars we do collect are locked up in ways that make them hard to use.
These are the facts whether we like them or not. It doesn’t get more basic than that.