Leftist analysis misdiagnoses LA fiscal situation

Edward Ashworth, who heads the left-leaning Louisiana Budget Project, claims that Louisiana’s current budgetary problems are as a result of the state’s recent income tax relief to middle-class-and-above families and an unwillingness to raise taxes to compensate, which results in “cuts in spending that hit the poor, elderly, schoolchildren, college students and the developmentally disabled hardest while largely sparing the wealthy and businesses.” Only the most careless reading of data and uninformed view of economics would support such a selective interpretation and recommend the wrong solution to the states’ budgetary woes.

Ashworth notes the estimated reduction in revenues from the 2007 act that allows none of the “excess” federal tax deductions to be taxed by the state and the 2008 act that reduced tax brackets on the middle class and above would be $681 million for fiscal year 2010-2011. In reality, this will be somewhat lower because of the recessionary/no-growth state of the national economy that shows no sign of abating any time soon. Note also this relies on a static, unrealistic view of economic behavior that insufficiently models dynamic human decision-making. Nevertheless, he produces the argument that state revenue sources are not being tapped to their full extent.

But this ability-to-pay argument is meaningless in a vacuum that ignores the spending side of the equation. For 2008, the latest year for which data are available, in per capita terms among the states for operating expenses Louisiana (minus its disaster relief expenses) was the fourth-highest, and reviewing only expenses coming from state-generated sources it ranked 20^th. In part, this stems from the large state apparatus tolerated in the state: the 12^th highest per capita in state employees. These statistics don’t scream out that the state taxes and spends too little.

Rather, they tell us that Louisiana distributes an extraordinarily large amount of transfer payments (the main use of federal funds) and otherwise does not have an efficient fiscal and bureaucratic structure for spending purposes. The transfer payments themselves, which are largely paid for by federal dollars and therefore only partially fulfilled by state money, are exacerbated by a state fiscal and regulatory structure which retards economic development and thereby increases the rolls of those receiving these.

Raising taxes would only worsen the situation by taking money out of the hands of the most productive segment of the population – in a recession no less – and giving it to a government that disproportionately allocates those funds to less-needed priorities and inefficiently implements programs using them. Thus this would perpetuate the problem of a poor economic climate that insufficiently creates wealth but over-manufactures poverty. Add to this the well-publicized inflexibility of the state’s fiscal structure that makes changing these deficiencies difficult and causes certain areas of state government to bear disproportionately larger cutbacks.

It also runs counter to expert recommendations regarding state fiscal policy. Economically, his contention about the state’s fiscal problems being a result of tax cuts implying their restoration would solve for them is erroneous, according to information provided by expert testimony yesterday in front of both the House’s and Senate’s fiscal panels. In a presentation covered nowhere in the media, University of Tennessee economist William Fox, head of its Center for Business and Economic Research, spent an hour outlining his views on the state’s fiscal condition.

As part of it, he made some telling points. First, he noted the main difficulty that Louisiana faced was in its reliance upon a sales tax with many exemptions. It was becoming less fertile for capturing revenue because of changing consumption patterns and an inability to be levied on sales from outside the state such as through the Internet. He figured it was costing the state some $300 million a year.

Second, Fox noted that the most efficient way to gather revenue, because it did not encourage avoidance, was to make a tax as low and as broad as possible. The individual income tax cuts of 2008 accomplished the first in a relative sense but did not do the second. In fact, the state has been doing the opposite: in 2007, it passed a law expanding the earned income tax credit – essentially giving funds to people who earn low salaries and file an income tax return that exceeds the tax liability, if any, that they have – that was estimated to cost the state $40 million a year.

This related to his third point, which was the key with income taxation was the main emphasis on lowering rates had to be on the top rate, also unaddressed by the recent cut. Finally, Fox noted that gimmicks such as raising the tobacco tax produce far fewer revenues that ever predicted because of the behavioral changes the cause – the dynamic ignored by Ashworth in his simplistic analysis.

Ashworth either knows none of this, as his approach sees income taxation area of emphasis and seeks to narrow the collection base with higher rates, or he does and lets ideology get in the way of reasoned analysis. He also ticks off some areas of reduced spending budgeted for this year yet doesn’t inform readers that the reason these areas are getting hit so hard isn’t because of a lack of revenues, but because of this constitutional and statutory inflexibility. And, he also incorrectly states the true impact of state resources being spent in the three most vulnerable areas, health care, higher education, and social services, and elementary and secondary education by looking at total spending, not state revenues apportioned to that spending.

In fact, Gov. Bobby Jindal’s budget increases state general fund appropriations – into which any income tax increase would flow – on health care by 15.57 percent, on social services by 0.43 percent, and on education by 1.93 percent (despite a declining student population), with only higher education getting a cut of 13.24 percent, totaling an aggregate increase of over $121 million, or about two percent, even as overall appropriations using the general fund hardly rises. In other words, particularly among the first three areas, Jindal is committing a higher proportion of state non-dedicated funding to them than previously.

But this is not enough for Ashworth, who advocates for the undoing of the tax bracket changes that would squeeze more from the roughly 60 percent of households that pay 96 percent of all individual income taxes in the state, thereby suppressing economic development and forcing more people onto assistance – all the while giving a pass to issues of government inefficient and over-spending that Jindal and others are addressing. Oddly, in his view it’s a sign of virtue that government takes and spends more when, in reality, he should be supporting policies designed to achieve revenues more efficiently and responsibly and to enable it to spend less through performing better and choosing wiser priorities.