PAR Says Proposed Tax Cut is Shortsighted Fiscal Policy

The bottom could fall out of the state budget if the bottom falls out of oil prices. To prevent an economic crisis in the future, the state should maintain budget flexibility and a diverse revenue base that includes a progressive personal income tax. The proposed return to pre-Stelly income tax rates and the state’s growing reliance on oil and gas revenues sets the state up for another boom and bust cycle. The elimination of the income tax, even if phased in, is not realistic. And, all proposed revenue dedications, which would further reduce budget flexibility, should be rejected.

Even if oil prices remain high, state revenues are projected to drop by $377 million from 2009 to 2010. That is based on a conservative estimate, and it may not present a problem if revenues exceed expectations even modestly. But, it is evident that a leveling off has begun. Further tax cuts or revenue dedications would exaggerate the state’s precarious position with a high dependence on volatile oil revenues and an inflexible budget loaded with non-discretionary expenditures that make up 53% of the general fund. Health care and higher education expenses total 63% of the remaining discretionary budget – leaving those areas most vulnerable to cuts.

For every $1 increase in the average annual price per barrel of oil, the state general fund grows by roughly $12 million. The newly adopted revenue estimate is based on a conservative annual average oil price of around $92 per barrel for the current fiscal year, $84 per barrel for 2009, and $72 for 2010. These projections may be low considering the spot price is hovering around $130, but the market could send that price spiraling downward.

The boom and bust cycle of the oil and gas markets leaves state programs vulnerable to drastic budget cuts when prices drop. But, as they rise, the additional funding allows government programs to grow and taxes – a more stable revenue source – to be cut. Just before the oil and gas crash in the 80s, mineral revenues climbed to 42 percent of the state budget. By 1999, the dependence on oil and gas was decreased to around 8 percent and has since doubled to nearly 16 percent for 2009. This trend is not a cause for immediate action to overhaul the budget, but it should discourage any efforts to cut personal taxes in response to the rising revenues.

The recent revenue estimate made available to the Legislature an additional $800 million in this fiscal year and next. There are certain limitations on how much can be spent without surpassing the spending cap, but the option is there to spend it all.

Two other approaches are being considered for use of the additional money: tax cuts and dedications. A handful of proposals currently under consideration would give back or tie up an additional $428 million in the fiscal year 2010 budget. When added to the projected revenue decline, this would create an $805 million problem for budget-makers next year.

One of those proposals would reduce the individual income tax rates for many filers and immediately restore the tax deduction for federal excess itemized deductions. That bill, SB87, would cost the state $297 million in 2010.

A variety of corporate and personal income tax cuts were enacted last year when additional revenues became available. The state cannot afford to grant another huge tax break in the face of projected revenue declines. Neither can health care or higher education programs afford to be put at even greater risk of budget cuts with the new set of proposed dedications. Each new dedication reduces spending flexibility when the budget outlook deteriorates.

In the future, it may make sense to return money to taxpayers. Amending the constitution to allow budget surpluses to be refunded to taxpayers would enable lawmakers to return tax dollars on a year-by-year basis without permanently affecting budget stability. Several bills that seem to be stalled would propose such an amendment to the constitution.

Rather than granting permanent tax breaks this year, legislators should make strategic investments that will promote the long-term development of Louisianas economy. The windfall offers Louisiana a long-awaited opportunity to tackle deferred maintenance, build infrastructure, pay down debt and provide matching funds for coastal protection projects. These are big problems and the rare opportunity to address them should not be forgone for short-term political gain.