louisiana state budget and its tax giveaways

State BudgetCivic Academy

Statewide Issues ConferenceSaturday, February 15, 2014

Jan Mollerjan@labudget.org225.925.2424www.labudget.org

Louisiana Budget Basics

About Louisiana Budget Project

Provides independent, nonpartisan research andanalysis of public policy issues and their impact on low- and moderate-income Louisiana families

Visit www.labudget.org

Poverty is a daunting problem

• Compared to other states, Louisiana has:

• 3rd highest rate of poverty (nearly 20 percent)

• 4th highest rate of child poverty (28 percent)

• 8th lowest median household income (slightly less than $43,000 a year)

• 12th lowest health insurance coverage, which also puts families at higher financial risk

Recent trends are troubling

Workers are treading water

• Wages have been stagnant or falling for years

• Since 1979, median wages have increased 1 percent, productivity is up 35 percent

Louisiana’s Experience

• Louisiana was in the middle of an artificial boom that brought record surpluses when the Great Recession began

• Then revenues plunged by 29 percent, but have recovered somewhat

• FY 2008: $10.1 billion • FY 2010: $7.2 billion• FY 2014: $8.3 billion

Louisiana vs. other states

• Louisiana experienced 5 straight years of mid-year budget shortfalls, more than most other states. Revenue growth is still anemic

• The states that took a more “balanced approach” to the recession that included targeted cuts and new revenues are starting to see surpluses again

Why Did Revenues Drop?

The weak economy is only partly responsible for the revenue drop between 2009-2011:

• 52 percent due to weak economy• 27 percent due to tax cuts (Stelly Plan repeal)• 21 percent due to mineral revenue decline

Total loss over 2 years: nearly $3 billion Source: Legislative Fiscal Office

Revenues are not recovering

• Even as the economy recovers, state revenue growth has been sluggish at best

• Louisiana is taking in the same amount of revenue (adjusted for inflation) as in the late 1990s, even though the population has grown

• State revenues as a percentage of overall economy are at a 20-year low

Boom, Bust, Treading Water

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15*

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

State General Fund

In b

illion

s

*Pro

ject

ed

Budget gimmicks

• To balance the budget, Louisiana has relied on a number of measures:• One-time money from property sales and legal

settlements• Tuition and fee increases• Spending down various trust funds• Amnesty for delinquent taxpayers

This is not sustainable budgeting. It is clear we have a structural budget problem.

The Impacts of 5 Years of Cuts

• Four years of frozen funding for public schools• $560 less per student by not funding inflation

• Five years of cuts for colleges and universities • $700million and counting, while tuition climbed 74

percent

• Health care services have been cut and charity hospitals privatized

How is the budget built?

State General

Fund, $8.62

Self Generated,

$2.45 Statutory

Dedications, $4.03

Federal Funds, $9.89

Louisiana's Budget by Source(in billions)

Total Budget: $25 billion

State General Fund

Discretionary $2.76

Non-Discretionary

$$5.85

State General Fund $8.62 billion

Most state general fund spending is “non-discretionary,” giving legislators little flexibility

Discretionary General Fund By Subject Area

Education, 37.7%

Health care and social services,

49%

Everything else, 13.3%

Discretionary SGF: $2.76 billionOnly 11% of total budget

Higher ed: 5-year trend

LouisianaArizonaNevadaNew HampshireMichiganPennsylvaniaOhioHawaiiWisconsinWashingtonMissouriIdahoIowaAlabamaMinnesotaNew MexicoOregonMassachusettsKentuckySouth CarolinaVirginiaDelawareFloridaKansasArkansasConnecticutOklahomaGeorgiaWest VirginiaMississippiColoradoNew JerseyTennesseeNorth CarolinaRhode IslandMaineNew YorkSouth DakotaNebraskaVermontUtahIndianaWyomingMarylandCaliforniaTexasMontanaAlaskaIllinoisbNorth Dakota

-45.0% -20.0% 5.0% 30.0% 55.0%-34.4%

-24.4%-21.8%-21.3%

-18.4%-18.2%

-15.3%-14.4%-13.8%-13.2%-12.8%

-10.0%-9.9%

-8.9%-8.6%-8.6%-8.2%-8.2%-8.1%-7.7%-6.7%-6.7%

-4.4%-4.3%-4.0%-3.4%-3.3%-2.9%

-0.5%-0.5%-0.4%

0.3%0.4%1.3%

2.8%2.9%

4.5%4.7%5.6%5.9%6.6%6.7%

7.7%8.0%8.1%8.4%

9.4%20.2%

35.1%61.4%

Source: Illinois State University

Health care and education at risk

• Legislators only have true discretion over 11% of the $25 billion budget—and most of that goes to health care and higher education

• This is why critical services have faced deep cuts since 2008

• Without sustainable revenue, Louisiana will continue to under-invest in human capital

FY 15 Executive Budget Proposal

• Proposed budget: $25 billion ($8.6 billion SGF)

• Decrease of $624 million from last year (mostly federal money)

• Fewer cuts than we have seen in recent years, but not cause for celebration

• The proposed budget does little to undo the damage of the last 5 years

Status quo in education

• Provides $12 million in new funding for K-12 students (also makes permanent last year’s one-time bump of $70 million)

• Colleges will keep funds from tuition increase and receive a modest bump in state support

• No new funding for early childhood education, despite bipartisan agreement on its importance and Act 3 reforms passed in 2012

Patching together health care

• Modest expansion of home care services for people with disabilities, many stuck on waiting lists for years

• Increase in funding for charity hospital private partners, but federal approval still pending

• No coverage expansion for low-income adults will leave quarter of a million Louisianans uninsured

Future outlook is troubling

• Uncertain federal financing for charity hospital partnerships

• Bills are due: • Rainy Day Fund: $300 million (2016)• Road repair backlog: $14 billion• College infrastructure: $1.8 billion • Invest in children, expand health care access, fix

the coast…

The Bottom Line

• “We’re running out of things to cut in state government.” – Sen. Jack Donahue

The evidence is crystal clear: More revenue is needed to fund critical services and the

investments in our people that are crucial to a strong, 21st century economy

Public Reaction

• 68% say budget has been cut enough

• 89% concerned about cuts to LSU hospitals

• 80% said Louisiana residents will lose access to health care

(Source: Southern Media & Opinion Research)

Where does our revenue come from?

Indi

vidu

al In

com

e

Sale

s ta

x

Corp/

busine

ss

Min

eral

s

Gasol

ine

Vehi

cle

Sale

s

Toba

cco

Gamin

g/Lo

ttery

Other

taxe

s/fe

es$0.00

$500.00 $1,000.00 $1,500.00 $2,000.00 $2,500.00 $3,000.00

Major Sources of State General Fund Revenue

In M

illion

s

Who Pays in Louisiana?

Source: ITEP

Louisiana’s Taxes Are Low

State Rank Total State & Local Taxes (as percent income)

1. New York 12.8

2. New Jersey 12.4

3. Connecticut 12.3

47. Louisiana 7.8

48. Tennessee 7.7

49. South Dakota 7.6

50. Alaska 7.0

Source: Tax Foundation

… Especially Property Taxes

State Median Property Tax on Home (2009)

1. New Jersey $6,579

2. Connecticut $4,738

3. New Hampshire $4,636

4. New York $3,755

48. West Virginia $464

49. Alabama $398

50. Louisiana $243

Source: Tax Foundation

But Sales Taxes are High

State Sales tax rate (state & local avg. percent)

1. Tennessee 9.45

2. Arizona 9.12

3. Louisiana 8.85

47. Delaware None

47. Montana None

47. New Hampshire None

47. Oregon NoneSource: Tax Foundation

High sales are a burden on low-income families and are a big reason our tax system is so regressive

Revenues will be a central issue

• Tax exemptions reform has been an ongoing issue for years

• Sales tax modernization and enforcement of online sales tax collection is emerging

• There is growing realization that Louisiana has a structural deficit and inadequate revenue

• Our tax system is regressive

Tax Exemption Reform

“Tax exemptions are tax dollars that are not collected and result in a loss of state tax

revenues available for appropriation. In this sense, the fiscal effect of tax exemptions is

the same as a direct fund expenditure.”

– Louisiana Dept. of Revenue

Exemptions Grew 167% in Ten Years(figures adjusted for inflation)

2001

$8.29 billionState Taxes

$1.82 billionTax Exemp-

tions

2011

$4.84 billionTax Exemp-

tions

$7.77 billionState Taxes

(in millions of dollars)

Tax Expenditures Are Mostly Hidden

• Louisiana’s tax code includes 468 different exclusions, credits, exemptions and other loopholes worth a combined $4.98 billion

• Tax expenditures have the same effect as other government spending, but receive far less scrutiny

• Corporate tax exemptions have grown dramatically in recent years

Not All Exemptions are Bad

• Sales tax exemptions on groceries, nonprofits, pharmaceutical drugs, and residential utilities are broad-based and effective

• The state Earned Income Tax Credit (EITC) is a cost-effective, proven anti-poverty initiative

• A reasonable degree of corporate tax uniformity with other states can help keep Louisiana competitive

But many are in need of review and reform

• Most exemptions have no “sunset” and are not regularly reviewed by the legislature

• We do not know if taxpayers a getting a good return on investment for exemptions passed in the name of economic development—in fact, in some cases we know we are NOT

• Every dollar that goes toward an exemption is a dollar that can’t be invested in education

Motion picture tax incentives

• Film productions eligible for 30% of in-state expenses, and 5% of payroll for residents

• After 10 years, there are fewer than 3,000 direct jobs that often last 4 to 6 months. We’re paying roughly $60,000 per job in subsidies

• Louisiana spent $231 million on film subsidies last year, and $1 billion over the last decade

Louisiana needs to phase down or cap the program

Tax reform is not going away

• Revenue Study Commission (2012): Recommended changes to exemption process—no results

• Gov. Jindal’s Tax Shift (2013): Parked.

• Kleckley Blue Ribbon Commission (2014): ?

Continued engagement on this issue is critical