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Forecast argues for tax cuts, spending changes

Louisiana’s Revenue Estimating Conference confirmed that revenues are slipping in the state as the infusion of federal recovery dollars begins to taper off. Once again, this fact reinforces the need for prudence in future spending commitments and for fiscal policy that will boost revenues in the future.

These realities may have been overshadowed by the fact that a healthy surplus both for the current fiscal year and predicted for the next were declared by the Conference. Focusing solely on that aspect, however, misses the larger picture if drawing the conclusion that the state now has “extra” money to spend on things which, absent changing expenditure priorities, would be the worst possible decision to make.

A retreating revenue picture demands caution with any new commitments, which are prudent only if revenues look likely to increase over time. Rather, the current scenario dictates that new spending be sparse and that reprogramming of current commitments takes place to ensure that a fairly flat revenue forecast does not strain future state resources as inflation erodes and unexpected but necessary new commitments eat into these revenues.

Policymakers must understand the surplus exists only because spending demands in some areas (obviously not in areas of recovery expenses) have declined. Bluntly, with 300,000 or so few citizens displaced by the 2005 hurricane disasters of the socio-economic class most were in, the majority absorbed more, often much more, in state resources than they contributed. It’s not that state revenues have and will continue to go up for anything to do an improved state economy or fiscal outlook, it’s that with significantly fewer people to support off of government money that programmatic, nondiscretionary spending has gone down noticeably in some areas such as education and health care.

If current practices don’t change, this means revenues will remain stagnant at best while expenditures will rise. This argues that policy must change to increase revenues, entailing alterations in both the revenue area (designed to increase the gross take) and in the spending area (reconfiguring the mix of expenditures in a way which will maximize the gross take).

An example of the former would be cutting income taxes. Gov.-elect Bobby Jindal has stated his preference of reducing if not eliminating these. Not only would this allow revenues to grow within the next few years because of the greater economic activity produced, but also the approach solves a political problem: the Constitution caps spending by the state and if Jindal wanted to spend all of the surplus he would need a two-thirds vote of both Legislative chambers to secure this. Tax reductions lower the spending levels for cap purposes.

An example of the latter would be passing legislation diverting transportation-related revenues to be spent only for transportation purposes. Under-funded transportation infrastructure has held back the state’s economic potential thus tax-generating potential of state business. The surplus dollars would cushion the amount removed from the general fund by this reform the transfer of which would boost future revenues.

Typical policy of the past in Louisiana would have this “surplus” blown on a number of new commitments, may of dubious value. Hopefully, Jindal and the new Legislature will understand the opportunity presented and take full advantage of it through tax cuts and reprogramming of spending.

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