1. 1 Fiscal Crisis in Louisiana March 10, 2000 Prepared by: John R. Rombach, Legislative Fiscal Officer State of the State

2. 2 New Millennium Budget Crisis Is the crisis real? DOA shortfall estimates for FY00/01: $500 to $640 million (depending on who and when you ask) If inflation, merit increases, and other nonessential increases are omitted, this figure drops to the $350 to $300 million range. At this point, real reductions to current services are needed to balance the budget through cuts.

3. 3 However, since revenue estimates for next year are $91 million over the current year, why is the shortfall so large? Obviously the crisis is not due to a fall in revenue collections! Is there a budget problem, or is there a budget crisis? - well, there’s both a problem and a crisis, and they’re two separate issues.

4. 4 The Budget Problem: 1991/92: “It’s the economy, stupid!”- Clinton & Carville 1999/00: “It’s the economy, citizens!” - Perry & Drennan Clinton & Carville used false rhetoric used to defeat George Bush. The economy had already recovered from the very mild economic slowdown in early ‘91 before Clinton began this theme.

5. 5 Clinton’s strategy of deceiving the American public was (and still is) successful. Is this the Administration’s strategy, or is it really “the economy”? Is Louisiana genuinely in a recession while the other states experience strong economic growth?

6. 6 If oil prices persist minimally in the $20 range, we anticipate a significant recovery in the southwest portion of the state. This will lead to an underestimation of revenues in our revenue forecast. Potentially, a considerable portion of the budget problem may dissipate in the upcoming year if the oil sector recovers. Louisiana’s economy is sluggish but marginally positive. Baton Rouge and Shreveport have substantial growth but the rest of the state has barely positive growth.

7. 7 Problems with the tax structure: Sales Tax: Is growing at a slower pace than the economy because: Significant losses due to internet sales. The nation is increasingly becoming a service rather than a goods producer. Most services are not in the taxable base. Solution:Either broaden tax base or implement a different tax. Internet sales will increasingly depress collection of sales tax.

8. 8 Corporate Income tax: This tax on profits has barely grown in the past ten years despite tremendous profits. Interstate and international corporations are able diffuse the tax burden. Solution:Implement a different type of tax (do not tax profits)

9. 9 Due to Louisiana’s tax structure problems (sales tax, corporate income tax, and declining mineral income) $100 million shortfalls are the “norm” for Louisiana state government. $100 million does not constitute a budget crisis but is a chronic, long term problem.

10. 10 The resulting impact: La. has not funded inflation or merit increases in 10 years; state agencies are required to absorb the increases. Civil servants have not received an general raise since early in the Roemer administration The results: Mediocre (at best) state services (since we rarely if ever delete programs, close institutions, or revamp either).

11. 11 The economic problem accounts for $100 million of the $350 million shortfall, there is still $250 million of the shortfall unexplained? What created this quarter billion crisis? Short term debt retirement - $134 million

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16. 16 Tobacco funds - $80 million -used in budget despite knowledge that they were going to be dedicated.

17. 17 Therefore: $134 milliondebt payments $ 80 millionTobacco settlement $214 millionThe CRISIS! Plus: $100 millionTax Structure Problem $314 millionrange of shortfall Why didn’t we know about this sooner? - (how come it all surfaced after the elections?!!

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21. 21 Is this the “new” way of doing business in Louisiana government - (a runaway budget followed by draconian budget cuts or a massive tax increase)?

22. 22 This “crisis” was: premeditated & irresponsible Options for solving the crisis: Administration has hinted at massive tax increase that provides sufficient funds for the following: Teacher’s pay to the southern average: ($220 million-LFO est.) College Prof’s to southern average: ($70 to $90 million - Regents est.) Funds for prior sins: ($214 million)

23. 23 Tax source: Value added tax (single business tax) Could be structured to remove onerous tax code such as the sales tax on machinery, the corporate income and franchise taxes, and some portion of the “temporary” sales tax on food and utilities and still achieve the above enhancements. They want to raise $2 to $2.5 billion ($700 million to 1 billion per 1%) It dramatically expands to taxing base to include services that are not currently taxed lawyers, doctors, accountants, engineers.

24. 24 or 5th cent sales tax (including 5¢ on food and utilities) Would generate $640 million. Does not address problems with the tax code; in fact, it makes it worse. Very regressive, very onerous on businesses, working poor, and retirees on fixed incomes. Bad idea, but might help push Louisiana to real fiscal reform.

25. 25 Other Options: Budget cuts and minimal increase in taxes and agency fees Utilize cuts until problem is reduced to the $250 to $200 million range, Raise fees in the $40 to $50 million range (focus on transportation, higher ed, wildlife & fisheries, and agriculture). As protection, could mandate Joint Legislative Committee on the Budget approval before implementation.

26. 26 Raise the 4th cent on food and utilities ($110 to $115 million). Raise the remaining amount through: marginal increases in sin taxes (tobacco, beer, gaming, etc)....or increased cuts (politically difficult)....or other financing possibilities that may (usually) are found

27. 27 1st use tax, processing tax., etc. Would not solve the crisis since it would be in court for a few years, but a bill will be filed.