The Louisiana’s Revenue Estimating Conference was supposed to be meeting this Wednesday in order to officially adopt the state’s income forecast for the next fiscal year, so there would be a target number for crafting the state budget. That meeting has been put off till the end of April, beginning of May – at the earliest.
Senate President Page Cortez offered a partial explanation when the Legislature reconvened briefly last week, saying, “The April 8 REC meeting will be rescheduled because we have no clear or real idea of what the COVID-19 economic effects will be.” And he added, somewhat ominously, “There probably will be no clear picture before late fall.”
Traditionally and usually, the four-member panel – comprised of the Senate President, the Speaker of the House, the Commissioner of Administration, and an economics professor – adopts new revenue projections by the end of a calendar year, for the next fiscal year which starts the following July first. This allows the governor’s administration to prepare a budget proposal which – traditionally and usually – the Legislature modifies when they meet each spring. Politically partisan machinations the past two winters have intentionally caused a deviation from the norm, as legislative members of the REC have refused to approve the projections. Since the state constitution requires unanimous agreement by the panel, that puts a halt to the entire process.
As of right now, the “official” revenue numbers for the fiscal year starting July 1, 2020, were calculated and adopted one year ago this week, on April 10, 2019. The budget proposal offered by Gov. John Bel Edwards was crafted from that starting point. It also included a wishlist of additional spending, based on the previously positive projections of state economists, which were pending official adoption by the REC.
It was generally expected that, like last year, when the REC held this April meeting, the Republican lawmakers who’d been saying no to acknowledging the increased revenue would go ahead and agree to one of the sets of numbers proposed by state economists – the “most conservative” set, of course. Yet on the very day the legislature convened for its annual session, Louisiana saw its first confirmed case of the novel coronavirus – and in the past four weeks that number has surged exponentially. The state currently has more than 16,000 cases, and nearly 600 people have died.
To slow the spread, people have been told to stay home, and the majority of businesses in the state have shut down. For how long? At least through the end of this month, and possibly longer.
What will the short and long-term effects of this be? As Louisiana Budget Project director Jan Moller said last week in a webinar presentation on the state budget, given to the Greater New Orleans Foundation, “We don’t know a lot, but we are certain that the budget we were dealing with a few weeks ago is not what we’ve got now.”
When the REC last met on January 31, the state economists’ projections were for 170-million additional state income dollars in the current fiscal year, and $103-million more for FY21, which begins July 1. At the time, Speaker Clay Schexnayder, whose non-legislative business is as the owner/operator of an auto repair shop, offered his own lower numbers, which were voted down as being not only “arbitrary” (as Commissioner of Administration Jay Dardenne said), but unconstitutional.
Perhaps the Speaker wasn’t just playing partisan games, as a Republican attempting to thwart the Democratic governor. Maybe Schexnayder had a “gut feeling” about what was coming. Well before COVID-19 became pandemic, there had been recession predictions for later this year. Last October, Moody’s issued a report predicting the effect on each of the states from a possible general recession. That report said Louisiana was expected to take a $2.5 billion state budget hit if the general recession manifested.
As LBP’s Jan Moller explained it during his webinar, “When the economy goes south, the need for state services goes up, and most states are poorly positioned to deal with the usual types of recessions. Louisiana as the nation’s third highest poverty rate, and about half the state’s population falls below what the United Way categorizes as the ‘ALICE threshold’.”
ALICE stands for “Asset Limited, Income Constrained, Employed” – and the most recently updated report shows 48% of Louisiana households can’t afford one or more of the average basic expenses of housing, food, transportation, child care, health care, cell phone access, and/or taxes.
Not only are far too many of our residents poorly positioned to withstand the effects of the measures put in place to slow the contagion rate of this virus, but Louisiana’s entire revenue structure makes our state, as Moller phrased it, “among the worst-prepared for this particular fiscal shock.”
Here’s why.
Sales tax and personal income tax make up more than two-thirds of Louisiana’s revenue income.
Tourism and retailing comprise large parts of Louisiana’s overall economy, but now people have been ordered to stay home. No tourists. No hotel/motel taxes. No shopping. No sales taxes.
Oh sure, people are still buying groceries, but the state doesn’t collect sales tax on food.
At least 100,000 residents are presently unemployed, and when they don’t receive a paycheck, the state Department of Revenue doesn’t receive those regular payments of their payroll withholding taxes. Additionally, Goldman Sachs issued a report on April first that states unemployment numbers are expected to remain high through 2021.
The due date for filing state income tax returns has been pushed back from May 15 to July 15. Those who have refunds due are still filing and drawing their dollars out of the state Treasury. But those who have taxes owing likely won’t be paying them before the new due date – which means those revenues previously expected in the current fiscal year won’t be realized until after the start of the next fiscal year, which begins July 1.
No gaming revenue. Casinos and racetracks, bars and restaurants with video poker machines are closed. That’s costing the state approximately $60-million per month in revenue.
Then there’s oil and gas – designated as “mineral revenue” for state income and budgeting purposes. The state has been receiving more than $550-million per year in mineral revenues, but that’s based on average oil prices just shy of $60 per barrel. Yet with Saudi Arabia and Russia engaged in an international game of chicken to see which can outlast the other as oil prices plummet, crude oil futures are trading for less than $25 per barrel today. Each one-dollar drop in the average annual price of oil lowers Louisiana revenues by between 11-million and 12-million dollars, according to legislative fiscal analyst Greg Albrecht.
Further, once the price per barrel drops below $35-40, most of the exploratory, new drilling and production sectors of the industry go idle. No money, no work, no taxes paid.
As LBP’s Moller observed during last week’s webinar, “When we have a disaster like a hurricane, there’s usually an economic bounce afterward. But nobody’s going to be buying a new fridge or hiring contractors to hang new drywall to rebuild from the virus. There’s no playbook for this.”
Do you recall the Moody’s report from October 2019, mentioned earlier, and that it predicted a $2.5-billion recessionary hit to Louisiana’s budget? Let’s look closer at what that would mean.
The total state budget is approximately $32-billion, with the vast majority of that coming from the federal government. Of that $32-billion, the State General Fund – state revenues – make up about $9.4 billion. Of that $9.4-billion, $6-billion is non-discretionary, meaning it must be paid in certain amounts – no matter what. These are things like the state’s bond payments and the MFP, items we, the people of Louisiana, have voted to constitutionally dedicate our taxes to, first and foremost.
That leaves about $3.4-billion in state revenue which can be classified as “discretionary.” This is the part of the budget state lawmakers argue over every year. 90% of it goes to health care and higher ed, meaning legislators are only “playing with” $340-million.
Remembering that disasters like hurricanes and – yes – pandemics are when the need for state services goes up, how do you cut $2.5-billion from $3.4 billion? Or more realistically and accurately, how do you cut $2.5-billion from $340-million, and still make the budget balance?
The math doesn’t work.
Moller put it succinctly.
“We cannot cut our way out of this one.”
At the very least, the tax reforms that have been recommended and discussed, rejected and disgustedly placed on the dusty shelf with all the task force and good government reports insisting that Louisiana’s present overall taxing scheme makes no sense, will have to be batted about and battled over yet again.
Maybe this time they’ll care enough about who and what has been lost, and vote to make the changes.