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Report demonstrates coming crisis of Blanco budget

The Louisiana Family Forum has issued a report on the current fiscal situation in Louisiana. Authored by former Legislative Fiscal Officer Johnny Rombach, its enthusiasm sometimes gets in the way of its message, but regardless the latter is unmistakable: the state is headed towards a fiscal crisis, one potentially exacerbated by policy choices being made during this legislative session.

Rombach makes three points in particular. First, the proposed operating budget of the state creates commitments likely unsustainable in the long run. Essentially, the report argues that the injection of federal aid into the state as a result of the 2005 hurricane disasters has created what we social scientists call a “discontinuity” in the rate of growth of revenue-gathering by the state. It states that the budget was growing at a particular rate, but the presence of aid (here the report gets muddy because it identifies the “Stelly” tax swap – more about that is in the report – and higher oil prices also as contributory factors) manufactured a temporary increase in the rate.

According to the report, the problem will come because recurring spending commitments track that bump up and state government assumes the revenue “bump” will continue to be reflected in revenue-gathering even if the rate of growth goes back to its pre-disaster level. In other words, in their spending decisions (which Rombach points out that 96 percent of that increase over the next couple of years is recurring in nature) Gov. Kathleen Blanco and her Democrat legislative allies assume that extra shot of revenues is not a one-time thing but will continue indefinitely – an assumption the report correctly points out is reckless.

Second, the Stelly Plan – lowering sales taxes but increasing income taxes – the report notes has the perverse effect of increasing the most marginal tax rates among the middle categories of filers, with the worst starting for two-filing families around $65,000 and ameliorating in higher brackets. This is because of the elimination of deductions: the lowest income families take few if any, barely if at all lowering their already low marginal rate, while for the higher income families the amount of deductions that can be taken in almost all cases are relatively small compared to their total incomes, so the relative increase they faced was not as large.

Rombach recommends restoring these mortgage and charitable deductions – a move the Legislature seems prepared to take. Unfortunately, lost in the criticism of the Stelly Plan is an overall critique of the very progressive income tax structure in Louisiana (which the report notes in passing that the Stelly Plan exacerbated, and it does call for lowering tax bracket thresholds to improve this) which is probably a greater impediment to economic freedom and growth in Louisiana. This would emphasize why the Stelly increases were suboptimal – taking money out of the hands of the most productive citizens.

Third, the report investigates the state of secondary and elementary education spending in Louisiana, given that a justification for a good portion of the new budgetary commitments is for this area, particularly raising the salaries of teachers. Echoing a point made often in this space, by no means does Louisiana under-fund in this area, particularly given the dismal performance of schools on a statewide basis and with no means to ensure educator accountability, despite the fact that these implementing measures, such as merit pay, improves education quality.

While the report sometimes is a bit unclear in its assumptions and methodological details, its premise seems sound: Blanco’s current budget makes imprudent choices that will haunt the state fiscally for years to come.

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