Gov. Bobby Jindal and legislative leaders last week managed to derail the "runaway freight train" known as Senate Bill 87 (as amended), which would have phased out personal income taxes in Louisiana over a 10-year period. Jindal and his top allies realized that as superficially attractive as eliminating the state income tax might appear, the move would gut Louisiana's ability to deliver essential services down the road. Instead of phasing out the income tax altogether, the governor has joined the movement to roll back the so-called Stelly Plan, which increased income taxes in 2003.
Before 2003, the only thing predictable about Louisiana's fiscal outlook was the annual budget "crisis" brought on by steadily rising costs and stagnant revenues. The causes of the yearly crises were easily understood but not so easily addressed: an over-dependence on mineral royalties, which declined precipitously after 1985; an equally heavy dependence on regressive sales taxes, some of which were renewed annually or biennially; and an income tax scheme that let many taxpayers off easy. Then, in late 2002, citizens statewide adopted the Stelly Plan, named for its architect, former state Rep. Vic Stelly of Lake Charles. Essentially, the Stelly Plan "swapped" higher income taxes for regressive sales taxes on groceries and residential utilities. The higher income taxes were actually an adjustment in the tax brackets. Under Stelly, individual income between $25,000 and $50,000 a year was taxed at 6 percent instead of 4 percent. The plan was designed to be revenue neutral at first and then increase state revenues in subsequent years as personal incomes rose. It worked exactly as planned.
Thanks to the Stelly Plan, since 2003 Louisiana has had a balanced tax system that relies more or less equally on income taxes, severance taxes and sales taxes. Louisiana levies no state property tax. Starting in 2006, massive infusions of cash from insurance settlements and federal hurricane relief swelled state coffers with higher-than-expected sales and income tax receipts. A sudden rise in oil prices likewise filled the state treasury. Faced with huge surpluses for the first time in decades, lawmakers now find the idea of rolling back the Stelly Plan irresistible. Gov. Bobby Jindal last week joined the chorus. It is now a virtual certainty that the Stelly Plan will be undone.
While no one likes to advocate higher taxes, the truth is that Louisiana still has many unmet needs, despite its current plethora of cash. The best that we can say of the plan to roll back the highest income tax bracket to its pre-Stelly level is that Stelly has already accomplished most of what it was designed to achieve. Rolling back the brackets now will "cost" the state about $300 million a year at first (the rollback won't take effect until 2009), but chances are the state's surpluses will continue to grow until then, and maybe even beyond. Thus, the impact of the rollback won't be as dramatic as some predict. Down the road, as personal incomes increase across the board, Louisiana will still derive a healthy share of its revenue from income taxes — and that's what Stelly was all about.
Most of all, the Stelly Plan was an example of lawmakers and citizens planning ahead. The result was several years of surpluses that insulated Louisiana from a national recession that has buffeted many other states. Earlier this month, the state Revenue Estimating Conference, a four-member panel that predicts how much money the state will collect each year, forecast an additional $824 million in revenues between now and the end of the next fiscal year (June 30, 2009) — and that's a conservative estimate.
In that same spirit of planning ahead, we support the compromise on Stelly — on the condition that lawmakers and Gov. Jindal use the Stelly-generated surpluses of this year and next to meet Louisiana's greatest longstanding needs. We cite a few examples:
• Getting out of debt — Louisiana has $10 billion in unfunded accrued liabilities in its retirement systems. With baby boomers now retiring, those liabilities will grow unless we start paying down that debt now.
• Infrastructure — Louisiana needs $13 billion to $14 billion to repair and maintain roads, ports and bridges. Ports are a particularly good investment for bringing new business to the state, and repairing roads and bridges will save lives as well as create jobs.
• Coastal restoration and flood protection — Louisiana needs at least $1.8 billion to match federal appropriations for levees and coastal restoration.
• Colleges — Our state faces $1.7 billion in deferred maintenance at state colleges and universities.
Some of these needs were partially addressed during the governor's second special session. But much more remains to be done. Cutting taxes looks good on any political résumé, but leaving Louisiana in tatters is no legacy to leave our children. We urge lawmakers and Gov. Jindal to spend the surpluses wisely.