Louisiana is facing a $1.5 billion budget shortfall in 2018 - a “fiscal cliff” which could hurt public schools, universities, public safety and health care programs that are important for a thriving economy. Unlike earlier budget crises, which were caused in part by downturns in the state economy, this latest problem is mostly self-inflicted.
What is the ‘fiscal cliff,’ and how big is it?
The budget shortfall is best explained as the gap between how much the state will collect in taxes in the 2018-19 budget year, and what it will cost to keep state government programs running at current levels after adjusting for things like inflation and unavoidable costs (such as an increase in public school enrollment). The shortfall right now is projected at $1.52 billion.
The reason people are calling it a “fiscal cliff” is because most of the shortfall is due to more than $1 billion in temporary tax measures that are set to expire on June 30, 2018. This overall shortfall is 15 percent of the entire state general fund budget.
How did we get here?
Louisiana’s current budget crisis can be traced back to 2007 and 2008, during the post-Katrina economic boom, when state government had large budget surpluses. The Legislature responded by passing income tax cuts that drained about $800 million a year from the state tax base. These tax cuts, combined with the economic slowdown during the Great Recession, created the “structural budget deficit” - an ongoing gap between the tax revenue the state collects and the cost to keep basic government services going at current levels.
For several years the state dealt with these structural deficits in two ways: By making deep budget cuts that affected most areas of state government. And by tapping into various reserve funds (“one-time money”) and using other budget gimmicks to cover the annual gap between revenues and expenses.
In 2015 and 2016, the state had run out of budget gimmicks and the Legislature had no choice but to raise revenues. They did this by closing some loopholes, reducing some tax breaks and by raising the state sales tax by 1 percent (the “clean penny”). But the biggest tax changes, including more than $1 billion in sales taxes, were temporary. The temporary sales tax meant that Louisiana consumers now pay the highest overall sales tax rate in the country.
How do we fix this?
Several organizations, including Louisiana Budget Project, have studied this issue and reached the same basic conclusion: Louisiana needs to reduce the sales tax by phasing out the “clean penny,” and make up the difference through income taxes. While the state has the highest-in-the-nation sales tax, our income taxes are relatively low compared to other states. There are many ways to do this, but one of the easiest fixes is to eliminate the state deduction for federal income taxes, which cost the state nearly $1 billion per year in lost revenue. By doing away with income-tax breaks that mainly benefit the most powerful in the state, we can move towards a stable budget and tax system that funds important state priorities.