Fiscal Session – Two Weeks In

The Legislature finds itself two weeks into a fiscal legislative session, which has take some unexpected turns.

Plan A – Tax Swap

Earlier in the year, Gov. Jindal strongly advocated an ambitious goal of replacing the income tax with sales taxes as an effort to spur economic growth and make Louisiana competitive with neighboring states such as Florida and Texas, which don’t have an income tax. I thought it was certainly an idea worth examining because of its economic development potential.

However, in his opening address to the legislature, Gov. Jindal stated that he was “parking” his plan due to concerns expressed that the state was moving too fast in the tax swap direction.

Much of these concerns stemmed from the fact that replacing the $3 billion in income tax revenue with the sales tax is difficult, particularly when the overall sales tax (state and local) is approaching double digits. Adding another 2 1/4 cents to the 4 cent state sales tax raised widespread concern. Also many business owners, whose services would be taxed, feared that they would not be able to just pass the services sales tax along to their customers. For many of them, the bottom line income tax relief would not offset the top line sales tax.

Although an increase in the tobacco tax was also proposed in addition to closing certain sales tax exemptions, there was still doubt about whether the total amount raised in the swap could bear the whole weight of the loss of the income tax without some unfavorable side effects for many individuals and sectors of the economy.

Another complication is that Louisiana also has a different fiscal structure than many other states without an income tax. Texas for example, has a smaller state government with more services being funded at the local level with a hefty property tax. Although Louisiana has cut is budget by $1 billion over the past few years, it still is, from a constitutional perspective, a “big” state government designed in the Huey Long model of maximizing state control, and his statue facing the Capitol seems to be a constant reminder. Lately, the state has begun to move away somewhat from this model in transferring more control to local government, it hasn’t moved away nearly enough to be able to afford repealing the income tax.

Plan B – Income Tax Phaseout

With plan A parked, plan B was to move more slowly and phase out the income tax over a 10 year period, and gradually address the lost revenue with further cuts or new revenue.

However, without a specific upfront plan to replace the revenue, many were concerned that the phase out would exacerbate the existing budget problems, and those bills were deferred without discussion.

Plan C – Now What – The Budget

Following the apparent death of Plan B, the good news is that the deficit will not be exacerbated, but the bad news is that there is still a deficit of ranging from $800M to $1.3B. While there are some revenue proposals filed, the fact that they are not coupled with a tax decrease, does change their perception quite a bit.

While we are talking about general fund deficits, let’s address budget cutting. Budget cutting is difficult because 75% of the discretionary general funds (which are not protected) are for the two H’s, higher education and health care. Over the past 5 years, the funding for these areas has been as follows:

5 Year General Fund History (Legislative Fiscal Office)

                                  2008-2009                  2012/2013                         

Health Care                $1.8 billion                  $1.9 billion

Higher Ed                   $1.4 billion                  $851 million

Note that higher ed has offset the cuts in general fund revenue by raising tuition and heath care has restructured significantly, privatizing operations and shedding over 7,000 state employees.

So stay tuned for Plan C…

 

Tim Burns, State Representative

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