Unproductive LA tax credits finally may get whacked

As the good news/bad news trajectory of oil prices overall negatively impacts Louisiana’s bottom line, political cover to rid the state of counterproductive tax exceptions could be at hand.

It’s not so much that revenues from the state’s excise tax on extracted oil comprise a large part of the state’s budget – the 12.5 percent levy’s proceeds making up about a fifth of budgeted revenues – but that a shortfall can be spread only around a limited portion of the entire budget. When last year voters unwisely locked in reimbursement rates for nursing homes and hospitals and cordoned off tens of millions of dollars to build artificial reefs until the end of time and still never could spend it all, that put over 80 percent of the budget off limits to reductions in the normal budgeting process for next fiscal year (most of this money could be touched if a budget adjustment during a fiscal year would occur with supermajority legislative approval). This means for FY 2016 one area is set up most for reductions, higher education, and another somewhat so, what has been left unprotected in health care.

The latter, since its levels of expenditures are the largest in the budget, presents an opportunity to cut with the pain most spread out, even after a few hundred million bucks got removed from the equation with the vote last fall. However, it lately has borne mid-year cuts when necessary, and another unfortunate development new to the calculus is that the Patient Protection and Affordable Care Act, in order to create the ruse that it actually was not going to cost the country extravagantly, dramatically has lowered its temporarily boosted reimbursement rates for Medicaid to doctors. The state holding back even more from the rate only would compound the impact of lower quality care through greater wait times and increased costs by pushing recipients to emergency rooms.

Higher education, by contrast, has a safety valve to make up for any cuts – increasing tuition and fees. With generous federal financial aid in terms of loans and grants, the Taylor Opportunity Program for Students paying for about a fifth of all full-time college students, and with plenty of ability to pay as Louisiana’s tuition rates are fourth-lowest among the states and District of Columbia with per capita income several slots higher, that can go higher by law as much as ten percent if the institutions meet performance targets. But that only serves as a limited buffer; this year, $1.367 billion was budgeted for institutions’ self-generated revenue and the cuts for next year are figured to be in the range of $300-400 million. An additional $200 million cut here, because of the smaller scale of spending as compared to health care, would reduce the state’s contribution by almost 20 percent and the total budgeted by almost 10 percent.

True, the system is overbuilt with too many institutions chasing too few students, but even if some campuses stopped operating entirely on Jul. 1, meaningful savings would accrue only after time passed and would not contribute much to the state’s bottom line. And on the health care side of things, one fool’s gold tactic, expansion of Medicaid, won’t help out much either in the short term, for while the state would pocket the roughly 38 percent difference in reimbursement rates as compared to regular Medicaid for this upcoming year, the problems from the rate cut would magnify still more, the difference would make up just a portion of the predicted shortfall, and it sets up the state for extraordinarily escalating costs starting in 2020.

On the revenue column of the ledger, with confirmation approaching in a couple of weeks, outside of the severance tax it seems they may come in a bit higher. Still, including that tax and considering the realism and wisdom of where cuts can be made (keeping in mind other significant revenues holes exist already that may not be fillable through the usual exercise of funds sweeps, such as the end of the latest tax amnesty program), it will be difficult to close the gap without making structural changes to the revenue-generating component.

The obvious path to take here is dealing with tax exceptions, with the king of wastefulness (with the solar and wind tax credit programs now on their way out) going to the Motion Picture Investor Tax Credit, followed by the Earned Income Tax Credit, and then perhaps the credit awarded for horizontal drilling for oil and gas. All deal with relatively small constituencies and empirically at best have dubious return to taxpayers (the drilling credit); at worst, they clearly have a negative impact.

Yes, these would have the impact of a tax increase (in the case of the EITC, more accurately a loss of subsidy), but only on relative small groups, unlike something on the order of the exemption on sales tax for the sale of unprepared foods, drugs, and utilities. And because of this aspect legislators normally averse to raising taxes, or at least without some offset elsewhere, could argue that these items’ counterproductive nature that only aid a few justifies their elimination.

And while Gov. Bobby Jindal’s known antipathy towards tax increases in any form might appear discouraging, the Legislature having to get these past his potential veto, the fact is the same two-thirds vote to pass a tax increase is required to override a veto. If that vote can be achieved initially to send the legislation to him, there’s no reason the same coalition can’t reform to override a lame duck governor’s veto on these.

However, assuming it’s just these three measures that got axed, the reality is that only the impact of no EITC would be felt significantly in FY 2016, about $50 million worth, with the others’ impact coming only slowly over the years. Trying to take out others has problems either of broader constituencies making them politically less possible, or with fewer beneficiaries are small and incremental in nature.

It’s a problem, but with fiscal difficulties looming so large, even in this election year part of the solution may come by ditching finally the least useful of tax exceptions.