A Stinky Defense
Remember the “Twinkie defense”? In 1979, former San Francisco city district supervisor Dan White was on trial for assasinating Mayor George Moscone and Supervisor Harvey Milk. White claimed “diminished capacity” due to excessive sugar intake, specifically naming Twinkies as one of the problem foods leading to his committing the murders.
House Republicans are trying similarly improbable defenses for the state’s chronic fiscal shortcomings, and they reek.
On Thursday, House Ways and Means took up a dozen revenue-raising bills, beginning with Rep. Terry Landry’s HB 11. It would make ½ of the 5th penny of sales tax permanent, and clean most exemptions from the remaining pennies of state sales tax. Supported by the administration, it would generate $543-million needed for the $648-million shortfall.
“This will go a long way toward paying for the services our citizens need and want us to provide,” the New Iberia Democrat told the committee. “And because it’s permanent, it keeps us from having to come back and do this again and again.”
Rep. Ted James (D-Baton Rouge) wanted to know what this would do for the state’s bond rating, since the three major bond rating agencies have Louisiana on a rating downgrade watchlist due to the continued uncertainties over sufficient and sustainable revenue.
“Temporary revenue is problematic. It is not looked upon favorably,” Assistant Treasurer Ron Henson testified. He reminded committee members he’s been with the office for 40 years, and has seen several ratings downgrades in that time, most often tied to state reliance on temporary revenue streams.
“If our rating gets downgraded, investors read that as additional risk to their investments. It also increases the state’s cost to finance bonds,” Henson continued. “The higher our financing costs and interest rates, the less actual money we will have to use – money that will cost us more.”
Landry’s bill preserves the state sales tax exemptions for food, prescription medications, and residential utilities. It exempts industrial utilities from two cents of the four cents of sales tax.
Revenue Secretary Kimberly Robinson explained, “This is one of the recommendations from the Tax Reform Task Force. Industrial utilities were taxed at 4-percent until 2008, when they were reduced to zero.”
That 2-percent sales tax brought representatives for the Louisiana Chemical Association and the Louisiana Mid-Continent Oil and Gas Association to the table to protest.
“Surrounding states don’t tax industrial utilities,” stated the LCA’s lobbyist Brian Landry. “We want ours to be zero.”
LMOGA lobbyist Tyler Gray was asked about the history of the tax, and told a different story than Secretary Robinson.
“It used to be zero, then in 2015 it was raised to 4-percent, scheduled to drop a penny each year until 2019, when it goes away again,” Gray said.
“So, Dow Chemical wants a new bridge across the Mississippi River, but they don’t want this. Is that right?” Rep. Ted James asked. “I don’t think it’s fair asking everyone else to give a little, and you guys are asking to go to zero.”
When the bill came to a vote, it failed, 6-11, along party lines.
Four similar bills, three of them authored by Republicans, were quickly heard and defeated, as well.
Then the committee considered HB 27 by Rep. Lance Harris (R-Alexandria). The measure confected by the House Republican Caucus chairman extends one-third of the fifth penny of sales tax for five years, while cleaning the remaining 4-cents of sales tax. And it makes industrial utilities exempt from all sales tax.
It raises just $369-million for the budget shortfall.
“This is what compromise looks like,” Harris told the committee. “This doesn’t cutas much as we want, and it doesn’t raise as much money as the governor wants, but to keep growing the size of government is irresponsible. We can’t continue to grow government on the backs of taxpayers, nor continue punishing our businesses and economy.
“This financial mess is state government’s fault, not ours. But it is our responsibility to fix it,” Harris said.
He went on to say that since the revenue shortage is “only $495-million” by their reckoning, and this bill raises $369-million of that, that would just leave $126-million unfunded. “So all we’re asking in return is a spending decrease of 1.33-percent,” Harris stated. “That’s doable. It’s not comfortable, but it’s not catastrophic.”
“Please explain this $495-million number you and Appropriations chairman (Cameron) Henry keep using,” Rep. James requested. “The administration and the Revenue Estimating Conference have set the shortage at $648-million.”
“That’s because the administration chose to use the REC figure,” Harris replied. “I want to use this year’s expenditure level because we need to shrink spending. We are using the current year budget as it existed in December 1, 2017. That says we are spending $9.4- billion in state general fund in the current year. We’re projected to have $8.9 billion in the year that starts July first. That’s a difference of $495 million.”
Here’s the problem with that reasoning: the $9.4-billion in spending Harris cites was based on the REC forecast adopted May 16, 2017 – more than a year ago. The revenue forecast has been upgraded twice since then: on December 14, 2017, and again on April 12, 2018.
It’s not the first time the House GOP cadre has taken a “choose-your-own-budget-number” approach. While they’re using a year-old spending number now, during the 2017 spring budget-drafting debates, they were insistent upon using the most recent number. At the time, that was “spending as of March 1, 2017”, following a special session needed to eliminate mid-year budget shortfalls. They then lopped another two-percent off that number in crafting their version of the next budget – an effort that ultimately resulted failure to pass a budget and last year’s second special session to remedy that. Clearly, the majority of the Legislature thought that plan stunk, and this one is just as smelly.
“So this is to raise taxes in the amount you want, not the amount the governor says we need?” Rep. Ted James asked, pointedly. “You don’t want to rely on the REC, and you don’t trust the staff, even though you trusted them when the governor was a Republican? They’re the only ones dealing in reality!”
James was referring to part of the House Republican leadership’s blame-game narrative of the past couple of years. In addition to their over-arching story of “it’s all the Democratic governor’s fault”, they have also targeted the Legislative Fiscal Office staff and the Revenue Estimating Conference.
In 2016, when fiscal note calculations didn’t produce the amounts of revenue they believed they should, Republicans took the rare step of calling a Fiscal Review Committee meeting to chew out staff members publicly and raise a stink.
And in 2017, the story House Republicans told aimed ridicule squarely at the REC.
“Nine years in a row, the REC forecast has been off,” said then-Rep. John Schroder (R-Mandeville).
“The REC is always wrong,” Appropriations chairman Cameron Henry (R-Metairie) stated repeatedly.
And House Appropriations called a meeting to publicly reprimand the REC’s economist, Dr. Jim Richardson, for those shortcomings. (The rest of the REC panel is comprised of the Commissioner of Administration, the Senate President and the House Speaker, who were not taken to task.) That stunk to high heaven, also.
But back to Rep. Lance Harris’ bill…
Rep. Ted James wanted to know about the five-year limitation on the proposed tax changes.
“We heard earlier how another temporary fix could affect our bond rating,” James said. “Don’t you care about that?”
“This is practicality,” Harris replied. “We need the five-year date on it to put it in the best posture to get the bill out of here and off the House floor. This is compromise.”
That’s when State Treasurer John Schroder showed up.
“I don’t think a five-year revenue bill should be a problem,” said the Republican, who was elected last fall and sworn into office in December. “The rating agencies don’t quite get it when they evaluate us. We are constitutionally required to have balanced budgets, and everything gets paid. I don’t understand why they worry about how we get there. In addition, we have the Bond Redemption Fund, which means they get paid first, even if everything goes to crap.”
“You said when you were part of this body that the REC is always wrong, and now you’re saying the credit agencies are wrong? So we are the only ones that are right?” Rep. James asked, incredulously.
“I didn’t say they’re wrong,” Schroder responded. “They like predictability, and I would argue that since this revenue goes beyond three years, that’s predictable.”
Still, the $369-million HB 27 raises is not nearly enough to solve the problem. It’s just over half of the actual shortfall of $648-million.
“You will have to make drastic cuts in health care, higher education and TOPS,” Commissioner of Administration Jay Dardenne warned. “And I don’t know why you would want to recreate this self-inflicted crisis in five years from now.”
Yet the committee approved the bill, 11-6. And it will be the only revenue-raising measure considered on the House floor today.
That stinks.