The Gov. Bobby
Jindal Administration announced
it wrung cost savings of around $50 million from government operations, involving
noncritical services and mostly from a spending freeze, vacant job
eliminations, and contract curtailment, of which about five-eighths must be
approved by the Joint Legislative Committee
on the Budget, and cobbled together about $130 million more revenues to
close the gap of $181 million. Of the revenues, about $24 million comes from a
funds sweep, around $74 million from underestimating revenues dedicated to
other purposes that could be repackaged into the general fund, and the
remainder was bonus tax amnesty receipts. None of the revenues found can be
counted upon to show up in the future.
The sixth of these in seven years
begs a few questions, starting with why the powers that be involved in revenue
determination, essentially the staffs of both the Governor’s Office and Legislature Fiscal Office, seem to miss on
revenue projections. In fact, from the first budget over which Jindal had
control, fiscal year 2009, through the last fiscal year for which data are
complete, FY 2013, the average overestimation was about $375 million – and FY
2009 actually turned out to be underestimation of about that magnitude, meaning
successive years had much higher overestimations. And in reality the
estimations usually are pretty good on the general fund side, which is mostly
income and sales taxes, where over the FY 2009-13 period all but one year had
forecasts barely under the actual results, that being FY 2010 when the forecast
overshot the actual by nearly $1 billion.
Each year’s revenues
disappointments are a different story – this one’s primary
culprit appears to be lower mineral revenues in part because of declining
worldwide prices – but regardless of the specific causes, something always
seems to come up. And the net effect is that Louisiana’s state revenues from
then until now never seem to grow to the level predicted, year after year.
Although FY 2013
revenues of $14.689 billion are not that far below the FY
2009 total of $15.038 billion, in the earlier year the tax cut enacted in
Jindal’s first year in office had only kicked in half way, the growth-dampening
fiscal policies of Pres. Barack Obama
were yet to come into effect, and vestiges of the hurricane recovery bonus
influx of federal dollars still remained. So between those years, state
revenues fell below $14 billion for each in that period.
One
explanation for the misfires is that jobs created have been on the lower
end of the income scale, explaining why the individual income tax component of
revenues seems to come up short relative to forecasts. However, this doesn’t
seem a likely candidate for a shortfall because it’s only been in the last year
that non-farm employment really has picked up – there were 1.926 million such
jobs at the end of 2009 and 1.937 million at the end of 2013, while now they
have surged
this year to 1.99 million – and because state government jobs have
decreased from a full-time equivalency of 93,239
at the end of 2009 to 66,930 at the end of 2013.
Further, total wage earnings in
Louisiana’s private sector have risen over this period from $83.8 billion to
$90 billion – a 7.4 percent increase exceeding the rate of inflation by a
couple of points while state-generated revenues decreased 2 percent. And to
make matters even more interesting, state
gross domestic product has catapulted upwards during this time from $184.2
billion to $196.9 billion in inflation-adjusted dollars, a 6.4 percent real
increase (and even with large personnel cuts in state government, total
government in the state GDP has increased about as much from $23.5 billion to
$24.9 billion).
With population only inching up
throughout this time, obviously the state is wealthier and better off in a per capita sense. Yet state government
revenues have failed to keep up, indicating a problem in translation.
Logically, given that wage earnings and GDP have risen smartly, that disconnection
would be at the income and sales tax levels but, here again, in this time frame
except for FY 2010 when things were way off, the typical error on these was
overshooting by $100 million or fewer.
Another is that tax exemptions,
which typically amount to half of the entire revenue actually collected, have
grown disproportionately, sucking out revenues that would have been thought to
materialize. But in fact they have pretty much tracked state revenue generation
changes, being $7.193 billion in size for FY 2009
and $7.084 billion’s worth in FY 2013 and
proportionally changing about as much as revenues collected in between those
dates.
However, looking at these in
aggregate may mask the impact of those that disproportionately bleed revenue
from the state. In other words, certain trends in recent years may have
exaggerated the impact that particularly inefficient exemptions had in
elevating disproportionately the total amount of exemptions observed. Data from
2009 through 2013 point the finger at a few possibilities.
One is the exemption granted to mineral
exploration involving fracking through horizontal drilling. If such a well gets
drilled, which accounted for the vast majority of new activity since 2008, it
is exempt
from severance tax from two years from production commencing or at recapture of
qualified costs, whichever comes first. As a result of this, gas production doubled
from 2009 to 2013 to 2,712 million million cubic feet, but because the average
severance take almost halved to 14.8 cents per MCF, due to the average price
dropping by a quarter but the remainder due to the exemption which went in this
period from $14 million to $228 million, this total amount of revenue available
hardly has changed over the years. Worse, gas wells of this nature typically
peak in production quickly, so the non-exempt phase misses much of the
production over the life of the well.
Another one is the birth of
Louisiana’s Earned Income Tax Credit, which only began in FY 2009 at $38.5
million and had risen steadily by FY 2013 to $46 million. Essentially it works
as a negative income tax for those that draw wages; not only do low-income
earners not pay income taxes that would be miniscule at best at their wage
levels, but they get money given to them. While it can help out low-wage
families, it also discourages pursuing full-time work or striving to become
more productive to earn promotions and it also makes it more likely that people
qualify for transfer payments, some of which would be supplied by the state and
thereby increase its costs on the other end of the deficit equation.
Then there’s, in terms of its net
cost to the state, the Moby Dick of tax exemptions, the Motion Picture Investor
Tax Credit. Unlike almost every other one on the books, it and its companion
entertainment activities actually have a legal requirement to report their
costs and benefits (every two years). Since FY 2009 the levels of these nearly
have doubled as well (though the latest reporting year FY
2012) and are estimated to go a couple of dozen million higher to $258
million certified for FY 2014, but are extremely inefficient as historically they
only return one dollar to the state treasury for every seven that go out. The
latest FY 2012 figure showed a $168 million net cost to the state. Worse, in
last year’s tax amnesty these credits were used to prevent
the state from collecting $67 million, a loophole closed for this year’s.
To summarize, large growth in these
least productive and significant-sized tax exemptions over the past few years
likely dampened revenues and accounted for a significant proportions of
forecast error. Without these, it’s possible that just in the past year the
state might have taken in some $500 million extra in revenues, and forecasters
would have undershot on the revenue side.
But undoubtedly some also is the
fault of Obama economic policies. For example, the loosening of qualifications
for disability payments – Supplemental Security Income – just like the state
(and federal) EITC creates incentives for people to quit or reduce work instead
of acting to supply tax revenue inputs and to grow the economy, and provides
incentive for them to access welfare programs that cost the state. This
combined with the general malaise induced by the Obama program of higher taxes,
increased regulation, and bigger government crowding out the private sector is
reflected nationally and in Louisiana by a decline in the workforce
participation rate. Reflecting the nation, Louisiana’s
has tumbled to its lowest point in 35 years, helped along in part (the
general malaise also discouraging people from seeking work) by an increase in SSI
recipients in the state for disability from about 155,000 in 2009 to
around 169,000 in 2013,
with almost all of that net increase occurring the working age population of
18-64.
So some of this is out of the state’s
control. But the main reason why improving state wealth and productivity has
translated into flat revenues would appear to be injudicious choices in tax
exemptions granted. Fortunately, this is a problem that can be fixed by reducing
in size or eliminating the offending items mentioned above, and others, and
constitutionally the Legislature may do so in the 2015 regular session.
Unfortunately, being that it will
happen just prior to state elections, legislators will be reluctant to involve
themselves with powerful economic and ideological lobbies that would fight to
prevent these kinds of alterations. So too will they get opposition for any
spending cuts right before many run for reelection or to sit in the other
chamber that could allow continuing affordability of these items to keep
placating the special interests behind these. Funds sweeps are uncertain,
amnesties are too episodic, and luck of the revenue draw can’t be depended upon
to salvage budgets forever. A combination of tax exemption reform and permanent
spending cuts would constitute a first step in making for a sounder fiscal
structure to state budgeting.
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