February 17, 2016
Louisiana’s current budget crisis is historic, but it’s not unique. Several other states — many of them dependent on high energy prices to subsidize state revenues — are also teetering on fiscal cliffs as 2016 begins.
Low oil prices are putting the squeeze on Oklahoma and Texas while a drop in coal production is hurting West Virginia and Wyoming. Illinois and Pennsylvania are struggling for other reasons.
And if you think Louisiana’s budget deficit ($900 million this year and $2 billion next year) is bad, take a look at Alaska, where legislators are trying to close a $3.5 billion gap, according to NPR. Or New Mexico where lawmakers were at one point staring down an $800 million deficit, KOAT-TV reported, a huge amount considering that New Mexico’s budget is one-quarter the size of Louisiana’s.
The budget problems in many states date to the economic decline that started in 2008. States have been slow to recover from that, so hits from oil revenue drops have exacerbated the problem, said Mike Leachman the director of state fiscal research for the Center on Budget and Policy Priorities.
“When you look at state budgets and what happened to state revenues, it really makes it clear why it was called the great recession,” Leachman said. “State revenues really did fall off the table and just about every state … had to cut the size of government. The size of the cuts was just massive and some states raised revenue in addition but it was a real struggle.”
While Louisiana depends on oil revenues as a significant share — about 7 percent — of state revenues, its budget structure is more complex than other oil-producing states. Leachman said that Kansas is probably the state with budget woes most similar to Louisiana’s, though Kansas has had its problems play out in a much shorter period of time.
Beginning in 2012, at the urging of Republican Gov. Sam Brownback, the Kansas Legislature passed a massive cut of income taxes, eliminating business-related income taxes that the governor said would be offset by an economic stimulus that would follow. The problem was that economic activity never emerged, and facing massive shortfalls, legislators were forced to pass a sales tax increase.
Some lawmakers were in tears as the sales tax increase passed, The Atlantic reported.
Lawmakers in Louisiana haven’t gotten that far, but the situation is remarkably similar, even if the timeline is extended. Some budget experts trace the start of the state’s money problems to the repeal of income tax increases under what’s known as the Stelly Plan, a restructuring of state revenues that also called for lowering the sales tax.
The repeal came as Louisiana was awash in one-time revenues, including federal funding that was coming into the state to aid recovery from disasters such as Hurricane Katrina and Hurricane Gustav. Critics of the state’s use of one-time revenues have said it shielded the effects of lowering income taxes that caused a long-term structural deficit.
Duane Goossen, a senior fellow at the Kansas Center for Economic Growth, said the reaction to the loss of revenue from income tax cuts was similar to the way Louisiana dealt with its budget problems. State officials began cutting expenses, they transferred money out of funds used for highway repairs.
“It really came to a head a year ago, in 2015, when after the bank account balance was gone and a lot of money had already been transferred, that had not fixed the balance,” Goossen said. “Kansas had the longest legislative session in our history last year, and it was very contentious and there were multiple things debated as possible solutions. The sales tax is the one that ended up passing.”
It was passed by a contingent of highly conservative Republicans — Democrats and moderate Republicans wanted to explore other solutions — but in the end was supported by Brownback. The opposition to the sales tax increase was mostly rooted in the fact that because Kansas doesn’t exempt sales taxes on food, meaning it falls particularly hard on the poor and working poor trying to keep their families fed.
“In essence, the Democrats and moderate Republicans last year were essentially stating they would only support something that would fix the problem,” Goossen said. “And they wanted to go back to the original source of the problem which was the income tax cuts and the complete elimination of business income.”
It’s unclear whether Louisiana legislators will want to take up increasing income taxes as part of the longer-term budget fix. The 1-cent sales tax increase — with exemptions for food and other essentials — is viewed by Gov. John Bel Edwards as a short-term fix that will be removed when the structural budget deficit is fixed.
The governor has also included other solutions for legislators to consider in addition to a tax structure similar to the Stelly Plan, such as ending the state’s practice of allowing residents to deduct their federal income taxes from their state income taxes.
Goosen said the big takeaway from the Kansas experience is that states can’t deal with their budget problems without thinking long-term. And raising sales taxes and cutting spending hasn’t been enough, either.
“Our conservative lawmakers felt forced to raise revenue in some way and they ended up choosing the sales tax. But even after doing that, it still wasn’t enough to cure the structural balance,” Goosen said. “We’ve got major problems on multiple fronts because of spending cutbacks. But even with that — even after spending pullbacks the gaps were still there, and lawmakers realized that there really weren’t realistic ways to cut back further. At least not in huge amounts.”
Read more from the Times-Picayune here.