In a recent op-ed column in USA Today, Gov. Bobby Jindal claimed Louisiana’s economy is stronger than ever, saying the state’s growth rate far surpassed national averages since he took office in 2008, thanks to tax cuts and a shrunken state government.
But despite all the prosperity Jindal touts, Louisiana’s budget is in a deep hole, and the supply-side economic policies that Jindal said would make the state’s coffers run over haven’t done so.
Next year’s projected deficit of $1.6 billion is the largest one yet in an annual parade of such shortfalls, and there are fewer places to look to plug the gap this time.
The reason for the yawning chasm between revenue and expenditures is basic: Louisiana simply isn’t collecting as much tax money as it was when Jindal took office, and the spending cuts he has made, though substantial, haven’t kept pace with the declining revenue.
In the last fiscal year, state government collected $10.3 billion in taxes and fees. That’s 8 percent less than it took in during the fiscal year ending in 2009 — 16 percent less when adjusting for inflation.
“When you’re going to make a tax cut, there are two things you have to do: Make the bold move to cut the taxes, and make the bolder move to adjust to what you just did,” said Robert Travis Scott, president of the watchdog Public Affairs Research Council. “That’s what didn’t happen. The fact that he cut taxes isn’t a bad thing in and of itself, but he didn’t adjust the budget to fit the new world, and the effect has been piling up.”
The lagging revenue is out of step with heady talk of an industrial boom in Louisiana.
State Sen. Jack Donahue, R-Mandeville, who chairs the powerful Senate Finance Committee, said he gives the Jindal administration high marks for its efforts to lure industry to the state, but he’s troubled by its failure to balance the books.
“I think we’ve had some impressive growth, but I would have assumed we were going to have revenue growth in the 4 percent range,” he said. “We haven’t had that, and that’s incongruous to me. I think it shows we need to take a look at some things.”
Charting the decline
There are several main drivers for the drop in revenue, but none is bigger than the decision by the Legislature, with Jindal’s begrudging backing, to fully repeal the income tax hikes in the Stelly plan that voters approved in 2002. The Stelly plan had enshrined an exemption for the sales taxes Louisianians paid on food and utilities, a tax long derided by critics as regressive, and it had raised income taxes on higher-income earners and limited deductions to restore the revenue that would be lost from the sales tax exemption on necessities.
But constituents groused when their income tax bills went up, and the Legislature opted to keep the sales tax reduction in place while restoring the former income tax levels, which led to a sharp drop in revenue. During the last fiscal year, the personal income tax brought 16 percent less money into the state treasury than it did six years earlier, when the Stelly plan was in place. Adjusted for inflation, the drop comes to 22 percent.
That wasn’t all. In Jindal’s first year in office, the Legislature also voted to scrap the sales tax that businesses used to pay on utility bills, which also caused a net revenue drop of several hundred million dollars. In large part because of that change, sales tax revenue last year was 7 percent less than five years earlier, before the exemption went into effect.
Of course, those legislative changes took place against the backdrop of a national recession, and that was a factor in Louisiana’s revenue slump, depressing both personal income and sales tax collections. It’s nearly impossible to parcel out how much of the decline in revenue can be traced to poor economic conditions versus those changes, because they occurred nearly simultaneously.
Changes in oil and gas prices also have hit Louisiana in the wallet. When energy prices drop, drilling tends to slow, which means there is less oil and gas to tax; the effect is amplified because the tax is assessed against the price of the commodity, not the volume extracted.
The amount of money the state got last year from severance taxes, royalty payments and other energy-related taxes was 14 percent less than in Jindal’s first year in office. That fall predated the recent swoon in oil prices, meaning the upcoming year’s numbers will be gloomier still.
Amid all these factors, the growth of tax exemptions, credits and giveaway programs has proceeded at an eye-popping pace. Corporate tax exemptions have roughly doubled, going from $1 billion to $2 billion, under Jindal’s watch; they have increased nearly six-fold since 1999. A December special report in The Advocate examined a half-dozen large exemption and rebate programs and found that their cost had swollen by more than $600 million since Jindal took office.
Over that same period, corporate tax collections have fallen so far they are now nearly an afterthought in the state’s budget: Corporate income and franchise taxes brought in just $479 million in the last fiscal year. That’s less than half what they brought in five years earlier. The drop results in part from the runaway growth in exemptions.
“One of the reasons the revenue side looks like it looks is because the exemption side has gotten so big,” said Greg Albrecht, chief economist for the Legislative Fiscal Office.
Reapportioning the burden
The effect of the various changes wrought during the Jindal years — along with outside economic forces — has been a reapportioning of the tax burden among Louisiana’s various interests.
Data compiled by Albrecht show the share of the burden borne by corporations has fallen by about half, to less than 5 percent of the overall tax pie.
Sales taxes, even with the new exemption on business utilities, have grown slightly in importance, now making up nearly a third of the total. And even though the collection of personal income taxes is down, those taxes have consistently provided roughly a quarter of the state’s operating money.
A hidden shift in burden also has taken place in higher education, which has seen its funding from the state cut by $500 million during the Jindal years. The bulk of the difference has been made up not in taxes but in higher costs and fees passed on to Louisiana students and families.
“That’s been a huge cost shift,” Scott said.
“The tax burden in this state has been shifting from those at the top to those at the middle and bottom, both through tuition and through income tax cuts,” said Jan Moller, director of the left-leaning Louisiana Budget Project. “When you repealed Stelly — and this was not just Jindal’s doing — you disproportionately helped taxpayers at the very highest levels.
“So the richest corporations and the wealthiest taxpayers have had their loads lightened. And folks at the middle and the bottom have not seen big tax cuts, but they’ve seen cuts in services, and they’ve seen fees go up. A lot of the shortfall has been made up in fees and fines. So the cost of everyday living has gone up.”
How the burden is shared in the future could become a key question as the Legislature prepares to convene in April amid the latest budget crisis.
To make up about a third of the shortfall, Jindal has proposed a massive curtailment of a program in which the state refunds inventory taxes paid by businesses at the local level. If it were to pass, the tax burden for Louisiana corporations would nearly double.
But the plan has been greeted with derision by the state’s business community. Stephen Waguespack, president of the Louisiana Association of Business and Industry, the state’s largest business lobby, has promised to fight the governor’s plan.
“In the past, we have typically viewed state budget challenges as an excuse to burden an ever-evolving private sector in order to fund the rarely evolving form of state government,” Waguespack wrote in a recent column.
In Louisiana’s recent history, however, the opposite has been true, as the state’s revenue numbers show. And some prominent Republicans have been starting to push back against the idea that asking business to carry more of the load is inherently a bad idea.
Rep. Tim Burns, R-Mandeville, has published several recent online columns questioning Louisiana’s tax structure — and Jindal’s unwillingness to consider anything resembling a tax increase.
“I’m a conservative Republican, but I don’t think that it’s necessarily Communist to make businesses pay for the privilege of doing business in your state, particularly one with abundant natural resources such as Louisiana,” Burns wrote in his most recent column. “Average citizens pay for the privilege of using resources of the state, so business should also.”
Donahue is reluctant to support a tax increase, but he thinks it’s high time to consider paring back exemptions — something the governor regards as the same thing.
“I’ve had a problem with some of these tax exemptions for a while,” Donahue said. “Do I really think we ought to be giving $275 million to motion pictures while continuing to cut higher ed? I think that’s nonsensical.
“Maybe all the dollars that come into the state (treasury) need to be appropriated (as expenses) by the Legislature before they go out, so we have a better idea of the dollars going out.”
Last year, when Donahue won passage of a bill that would have required that tax credits and exemptions be listed on the annual appropriations bill, Jindal vetoed it, saying he had done so after consulting with Americans for Tax Reform, the Washington outfit behind the anti-tax pledge Jindal has committed to honor.
What to do?
The great inventory tax debate could well further shift tax burdens in Louisiana away from corporations and toward individuals. Waguespack has said LABI would support a constitutional amendment repealing the inventory tax altogether, which would result in a net gain to the state of nearly $500 million — money Waguespack argues could be invested into Louisiana’s battered higher education system. Jindal has said he’d support that idea.
But that leaves open the question of what local governments would do to make up the shortfall. It’s a particularly vexing question for industrial parishes like St. James, where the inventory tax accounts for more than 40 percent of property tax collections. (In lightly industrialized Orleans Parish, by comparison, inventory accounts for less than 3 percent of property value, according to the Louisiana Tax Commission.)
To make up for the loss of inventory taxes, places like St. James probably would have to pass steep millage increases, which would fall largely on the backs of homeowners and small-business owners.
In property taxation, too, Louisiana is hamstrung by large-scale exemptions, two in particular: the homestead exemption, which shields the first $75,000 of the value of all owner-occupied homes in the state from most taxation; and the industrial tax exemption, which shields most large industrial facilities, and improvements to them, from all taxes for a decade.
Those two exemptions are roughly equivalent in total value, according to a recent analysis of Louisiana’s tax structure authored, at the Legislature’s request, by a team of economists led by LSU’s Jim Richardson.
Here, too, the burden has gradually shifted away from business over time. The study notes that, while generous, the homestead exemption’s impact has “eroded over time as property values increased.” In 1990, the exemption reduced the taxable property base by 28 percent; that number is now 16 percent.
But the industrial tax exemption, because it shields the entirety of industrial investments from taxation for a period, has not shrunk in the same way. And as a raft of new large-scale projects are built across Louisiana’s industrial heart, the impact will only grow.
Signs of flexibility?
The Richardson study recommends decreasing the industrial exemption from 100 percent to 80 percent and granting it only with the agreement of local officials, who are the ones affected by having the property taken off the tax rolls. Currently, those decisions are made by the state Board of Commerce and Industry, which rarely if ever rejects an application for an exemption.
Scott, of PAR, thinks industry may be willing to bend.
“I don’t think these companies mind paying some property tax; they just want predictability,” Scott said, adding that he thinks companies would likely be OK with paying an agreed-upon amount each year instead of a tax based on assessed value. In that scenario, which is common throughout the Southeast, “they don’t have to worry about increased millages or inflated assessments. It’s a very reasonable way to do it,” he said.
But even a change like that would do nothing to fix the short-term problem because the state has already signed binding agreements for what’s already being built. It would affect only future projects.
As the argument begins, Scott and Donahue both say their biggest concern is that state leaders — in their haste to fix this year’s problems — will choose a short-sighted solution that impedes a long-term structural fix.
“Everywhere you turn there are tough decisions,” Tim Barfield, secretary of the state Department of Revenue, said in an interview. “And that means there are stakeholders that are going to be pushing back.”
Follow Gordon Russell on Twitter, @gordonrussell1.