Tepid restructuring in budget can induce more reform

If readers, like myself, missed at the annual meeting of the Louisiana Political Science Association today the discussion of Louisiana’s fiscal year 2016 budget submitted yesterday by the Gov. Bobby Jindal Administration, this space will try to substitute in part for that.

This budget was in rickety shape from the moment the FY 2015 budget went into effect, courtesy of the bizarre fiscal structure of the state where four-fifths of revenues are dedicated to some purpose (state- or federal-determined) and the remainder of these responsible for health care, higher education, and constitutional offices. As problematic as that is, it was manageable, but the legs got kicked out from under it when extraction royalty and severance tax revenues took a nosedive due to sharply falling oil prices.

Thus spurred ideas to balance, leading to three interrelated aspects of the FY 2016 budget, which drops total state spending from enacted levels for FY 2015 over a billion dollars – although notably that amount still is higher than actual spending of two years ago by about $800 million, which is an increase about at the rate of inflation. In order to accomplish this, higher education was reduced from FY 2015 enacted to FY 2016 budgeted almost as much in that year as the entire $228 million (not adjusted for medical education) decline from FY 2009-15. Only because of an assumption built in that the Legislature would excise the refundable portion of a dozen tax credits did it not amount to an additional $526 million cut. And the budget turned in also suggested that the Legislature and higher education combine forces to infuse perhaps $100 million or so more in revenues into that system through various operational means and fees.

Yet even with that extra amount, this represents about a 5 percent cut. Oddly, while those recommendations included increasing fees and differential charging for graduate degrees – the latter because it would have no impact on the amount the state pays into for the Taylor Opportunity Program for Students, budgeted for around $284 million that would reduce any revenues garnered from a tuition hike by roughly a quarter – it did not contain an assumption hinging on a change in the law that schools that made their performance targets could raise their tuition beyond 10 percent. As previously noted, compared to all the states Louisiana disproportionately relies on taxpayers, not students, to fund higher education, with tuition significantly underpriced relative to the typical household’s ability to pay. It makes little sense that the direct beneficiaries of higher education receive relatively so much subsidization of it and that the state not allow for more revenues to come into higher education from keeping an artificial lid on tuition.

By contrast, the disposition of health care spending featured only around $60 million less given increasing efficiencies in delivery, the most consequential cut without alternative funding available from other sources causing elimination of the LaHIPP program that pays individuals and families for insurance provided by employers, which saves the state in that without it these beneficiaries become more likely to go onto Medicaid and creates an incentive for fewer employed. More substantially, the budget denied requests for increases in services, such as an expansion of waiver services for the disabled eligible for but not receiving these, now cancelled, and additional reimbursement for expansion of services in state hospitals now run by nongovernment entities that had occurred after the state turned over management of these. This brings up the possibility that these additional services, which occurred in tandem with savings to the state, may not continue.

However, the most visible budgetary flashpoint will luminesce over the tax credit refund cancellations, in that about three-quarters of that amount comes from the inventory tax/ad valorem tax credit, which while technically at the state level operates as a refundable credit, the removal of the refundable portion has the practical impact, all other things left equal, of raising taxes on business, and thereby will translate into higher prices for consumers. Pegged at $377 million, that refundable portion accounts for around 90 percent of the most recent entire rebate sent out.

The convolution of tax policy behind it produces this outcome. About three-quarters of the states do not tax inventory, but the 1974 Constitution permitted parishes to do so. As part of the state’s populist history of keeping individual taxes low and then making them up on business (which self-defeats as these get passed on to consumers), the presence of no state property tax and a country-high exemption on homesteads from parish property taxes, in order to allow parishes to have a crack at some substantial property tax revenue, the “other property” assessment allowed in the Constitution permits taxation on inventory, except for that of imports and exports, in transit, coal, and offshore drilling rigs.

But in 1991 a law was phased in to relieve manufacturers and natural gas distributors of this annoyance. Not only does it offset corporate income and franchise taxes – one reason why corporate tax collection in Louisiana has declined and disproportionately weighs on service- and information-based businesses, even as the rebate has surged in the last decade – but it also completely rebates for the parish taxes. As this tends to concentrate the benefits disproportionately in a smaller number of parishes and businesses, they will have every incentive to fight it. Given its size, any but the most minor change to this planned end to it will trigger large spending cuts and/or the necessity of grabbing revenues from other sources.

Still, this does not seem as contorted as one of the supplemental items suggested to reduce higher education cuts, a fee increase for families sending members to college, then recaptured as a tax credit, to be funded by an increase on cigarette taxes. Ironically, Jindal fought tooth-and-nail the last attempt to raise taxes on tobacco, only now to suggest this strained swap that does not constitute good taxing policy.

This outline presented to legislators avoids worse case scenarios, but still leaves plenty of controversy. Some, including a number among majority Republicans, have said they more aggressively would pare back tax credits; a good start would be the motion picture investor and earned income tax credits. Undoubtedly business interests will battle back against the inventory tax credit refund portion going away, but where then to raise other revenues or what other spending to cut will limit traction on this issue. The more visionary policy-makers hope to make the tussle an opportunity to begin implementing long-term structural changes in the state’s fiscal structure and process of prioritizing and matching needs to resources.

And a good place to start would be with deciding questions such as whether families with college students pay their fair share for the cost of education, whether that higher educational system is overbuilt, whether the property tax regime in the state should favor individuals so much as opposed to business and how to make that more efficient and equitable, whether proceeds from increased cigarette taxation get put to a sensible usage, and so on. Unfortunately, while it makes strides in efficiency, often by contracting, and it takes hesitant steps in this direction, this budget as written only begins to broach those kinds of considerations; any other progress in this area will depend upon outcomes of the legislative process.