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Jindal plans for nonrecurring surplus best for growth

As the special session on the (mostly nonrecurring) surplus begins in the Louisiana Legislature, it is worth noting that the call could allow for a variety of uses of the funds. Gov. Bobby Jindal is going to push for a largely sensible set of mostly spending priorities. But there are two other alternative uses which should be explored theoretically before deciding to spend it on nonrecurring items.

First, not politically popular but not a bad idea would be instead of putting the Constitutionally required portion (in this instance, $73 million) into the Budget Stabilization Fund (i.e., the “rainy day fund”), to put it all, over a billion dollars, there. The Jindal Administration has warned that budget shortfalls are a distinct possibility after next year, so the money could be sequestered and used in, say (according to law), two of the next four years, plus it would generate a healthy amount of interest, perhaps $100 million, over that span.

However, the risk in doing this is that it may provide a false sense of security to lawmakers in the future, encouraging them to make up deficits with it instead of making different spending choices. Even the Jindal Administration is not immune from falling into this trap; for example, in the regular budget coming during the regular session $60 million is added to nursing home reimbursement when in fact simple changes in those standards to approximate other states’ rules would save Louisiana nearly $100 million a year.

The other option, again focusing only on the nonrecurring funds, would be to distribute the billion or so dollars as one-time rebates to taxpayers. (Since these are not recurring monies, they cannot be used for a permanent cut in taxes such as by reducing marginal rates.) By itself, this idea has considerable appeal – if government has taken too much of the people’s money to finance current activities, then why not give it back to its rightful owners?

But in a larger context, it’s not as good of an idea. First, if the purpose of letting people keep more of what they earn (besides its inherent morality) is to promote economic growth, that is accomplished through supply-side activities – working, saving, and investing – not through demand-side priming; typically, a “bonus” of the kind a rebate is does not stimulate these activities but is spent in ways that don’t encourage productivity or wealth creation. Second, while a largely ineffective idea of promoting economic growth at the national level, they are even less effective when isolated to the state level.

Nonetheless, this is still a good idea even if not nearly as effective as cuts in marginal tax rates – until you compare the small good that would come from that with the larger good being served where the proposed spending is to go. Addressing about three percent of total roads needs, saving $297.5 million in unfunded pension costs before 2029 (about a fortieth of the outstanding balance), and making a down payment of $300 million on coastal restoration when at least $10 billion more will be needed (fortunately for the state, much coming from the federal government) – in the long run, these uses among others will provide greater economic development benefits than a one-off rebate.

If proponents of giving the people’s money back to them are serious about the issue of greater economic development during this session, they will talk about using the almost billion dollars in declared recurring surplus funds most of which is intended to be dealt with (except for cutting business taxes and tax deductions for tuition and other education expenses) during the regular session – legislation doing so permitted by the call. Economic realities suggest that the spending priorities for the nonrecurring funds advanced by the Jindal Administration will lead to better economic growth than the alternatives of “saving” it all or giving it all back as a “bonus” to taxpayers.

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