Incoming Louisiana Governor Faces Budget Test

By now, the budget crisis in Louisiana is the stuff of legend. Driven by former Gov. Bobby Jindal’s nearsighted tax policies (all cuts and no investments) and exacerbated by anemic oil and gas revenues, the state faces a $750 million shortfall in the current fiscal year as well as a $1.9 billion shortfall for the fiscal year starting in July.

The test facing new Gov. John Bel Edwards will be to balance the need for new revenue with the need to support the ordinary Louisianans who were left out in the cold by the Jindal administration. This week, Edwards proposed increasing taxes and tapping state reserve funds to stave off the largest deficit in state history. He is expected to call a special session in mid-February to float, and hopefully gain support, for his tax plan.

The governor has proposed closing the current year gap with a one cent increase in the state sales tax, bringing the rate to 5 percent. Groceries, prescription drugs, and residential utilities would not be subjected to the sales tax increase. The sales tax increase would raise revenue by $216 million between now and late June (and raise more than $800 million over a full year). Edwards would also transfer $128 million from the states rainy day fund and another $200 million from an oil spill cleanup fund to the state’s general fund. Altogether, these moves would raise revenue by $544 million — not enough to cover the $750 million shortfall.

Gov. Edwards also proposed some long-term solutions to Louisiana’s structural budget problems, brought about by overreliance on one-time money, rolling back tax increases put in place more than a decade ago, and other gimmicks. He supports increasing  income taxes, specifically singling out the federal income tax deduction as a reform-minded idea that would raise much needed revenue.  An ITEP analysis found that eliminating the ability for Louisiana taxpayers to deduct their federal income taxes from state returns (only 5 other states allow this practice) would raise around $1 billion with more than 80 percent of the increase being paid by the wealthiest 20 percent of taxpayers. Edwards suggested he would also be open to lowering corporate and individual income tax rates if conjunction with the deduction repeal.

While the governor acknowledged that a sales tax increase — a regressive measure — is not an ideal solution to the crisis, his officials note that only a sales tax increase would offer a secure revenue stream to make up the shortfall this fiscal year. Budget officials also acknowledge that the governor’s proposals are a menu of options for legislators, given the need to get approval from his opponents in the statehouse. Lawmakers have signaled a willingness to consider tax increases given the dire circumstances, including an effort to examine the use of tax breaks in the state.

One proposal that the governor suggested in December that should still be on the table is his pledge to double the state’s EITC as part of an anti-poverty agenda. While perhaps a hard sell given the state’s deficit, putting more money into the pockets of working families would support the state’s economy, help lift more families out of poverty, and help offset the impact of a likely sales tax hike.