Lots of fiscal pain ahead for Louisiana in Katrina's wake

Around a good part of Louisiana, a week ago one could never have known that Hurricane Katrina and its aftereffects dealt a massive blow to the state, as the sun shone and in many parts about life seemed fairly normal. Just how badly will become reflected in state finances for fiscal year 2005-06, and that impact will be felt far and wide, and probably into succeeding years.

The grim fact is the greater New Orleans area has roughly one-third the state’s population and perhaps an even greater share of total state economic activity. This is because the area is home to two high-volume, high-dollar activities disproportionate to the rest of the state, oil and tourism.

There will be some displacement, of course. Some economic activity will flow to other Louisiana cities, Baton Rouge in particular. Higher gas prices will boost severance tax collections a little (even as the reduced volume does the opposite). And with the federal government pledging already $10.5 billion for rebuilding, that (maybe half; we do have to share with Mississippi) is money entering the economy which likely never would have come this way (as are insurance payoff dollars, estimated in the area of $26 billion of which almost 80 percent should come to Louisiana). But the negatives are going to outweigh the positives by far.

We can estimate that 40 percent of sales taxes, severance taxes, alcohol and beer taxes, auto rental taxes, and individual and corporate income get generated through the area. One-third of all of the remaining kinds of taxes and other forms of revenue tied to economic activity we can estimate come from the area as well. And, of course, it generates 100 percent of the land-based casino receipts

Now (and this is being optimistic; for example, do we really think the land-based casino can earn half of what it was projected to?) let’s cut these totals in half for the 2005-06 cycle. Thus, the state may expect only 80 percent of its anticipated revenues in the areas of sales taxes, alcohol and beer taxes, auto rental taxes, and individual and corporate income (let’s move severance taxes to the other category, given higher prices), and only 83 1/3 percent of anticipated revenues from other sources. (A few small revenue sources should not be affected by the disaster, such as interest earnings.)

This leaves the state with a shocking $1.625 billion loss in anticipated revenues for the next year, almost 9 percent of projected revenues for a budget which we hear every year is short on “needs.” Of course, state expenditures will go down because it won’t be making ordinary expenditures particularly around New Orleans and which ones it will be making now will be subsidized by the federal government. Again, though, some of the expenditures (health care, welfare, etc.) will get displaced just as revenues did. And even new ones may get created.

One could argue the state could draw substantial tax revenues from the $25.5 billion or so federal and insurance money coming in. Assuming it all comes in over the next ten months and the state grabs 4 percent of it (sales tax rate on many items; again, this scenario is optimistic), it’s not far fetched to surmise that the fiscal year 2005-06 budget will end up half a billion dollars in the hole.

Your guess is as good as mine where that money will come from, but I can tell you there will be no educator pay raises, no new initiatives, nor even expansions in practically every state program. Indeed, we are likely to see cuts.

So let’s try looking on the bright side. Maybe this looming economic crisis, of a magnitude the state never before has realized, finally will spur long-needed reform efforts. Simple spending priority alterations such as in the way long-term health care is managed (transferring dollars from institutional to community-based care) and elimination of inefficient uses of state monies such as the notorious Urban and Rural (slush) Funds may come about. Hopefully, other efficiencies may be squeezed from a bloated government.

(Keep in mind that this is an optimistic scenario. Not only must reformers grapple with a political culture that thrives on handouts rather than responsibility, but a lot must go right in the rebuilding process. For example, basically there is now no highway approach from the east to New Orleans. Until this is fixed, economic activity will be severely affected.)

Still, these together would probably save only about $125 million a year. Even if in the short run much of the state will see an increase in economic activity, do not be fooled. The huge hole left in Louisiana’s economy will provide plenty of pain for all taxpayers and producers of wealth and, worst of all, a nontrivial portion of this population will choose to do what many other of their brethren have in recent years – leave the state, aggravating matters even more.