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Rasing Revenue and Cutting Budgets

The question will be asked, "Why in the midst of one of the best economies this state has ever enjoyed was it necessary to raise taxes during the recently completed legislative sessions?" Unfortunately, the answer is not a simple one. A combination of special budget issues and tax structure problems created a situation which required the budget be cut and taxes raised at the same time in order to continue vital government services.

The following is an explanation of some of the major factors that combined to make the preparation of the FY 01 budget a daunting task. The explanation begins with a quick review of the financing problems that have plagued the budget process for years and that show little sign of easing up in the future. One of the things that will become apparent in reading this section of the report is that the budget can only be balanced with periodic tax and fee increases coupled with the non-funding of many basic expenditure items. Unfortunately, it will not stay in balance for very long without additional tweaking of the revenue base or significant reductions in expenditures. There have been numerous efforts in the past to correct this problem, but regretfully, none has been successful.

Historical Perspective on Revenue Growth

The tax structure problem has been years in the making and rears its head from time to time in the form of stagnant or declining revenue growth. The problem can be traced back to the early 1980’s when oil prices, which had been on the rise since the late 70’s, dropped precipitously. To replace the mineral revenue, the legislature had to raise taxes in 1984.

It wasn’t long after 1984 that the budget was out of balance again. Money was borrowed from special and dedicated funds in the treasury to keep the budget afloat. When it became apparent that the borrowed funds could not be repaid, the legislature in 1989 created the infamous Louisiana Recovery District. This political subdivision (with boundaries coterminous with those of the state) issued bonds (something the state couldn’t do because of a constitutional prohibition), gave the proceeds to the state to repay the special and dedicated funds, and paid off its bonds over a ten-year period with the avails of a 1¢ sales tax. The state repealed 1¢ of its sales tax so that the District could impose a 1¢ sales tax. This way there was no net increase in taxes. The District used some of the avails from the tax to pay its annual debt service and gave the remainder back to the state for use in the operating budget.

To eliminate the problem created by the failure to repay interfund borrowing, the legislature passed a law that required all interfund borrowing to be repaid before the end of the year in which the borrowing occurred. While this eliminated the situation that existed in the past where deficits were allowed to accumulate from year to year, it did nothing to address lagging tax collections that had created the need to borrow and not repay in the first place. Closing the door on interfund borrowing across fiscal years eliminated a revenue stream that had been used to finance general fund operations in the mid-1980’s and forced the legislature to look at new taxes to replace these funds. By 1988, the legislature found it necessary to levy a 2¢ sales tax on food and utilities, and in 1990, it created the state lottery.

By the early 1990’s, revenues were lagging again. At the same time, Congressional changes to the federal Medicaid program created an opportunity for the state to use its network of charity hospitals to substantially increase Medicaid reimbursements. The program was referred to as the Disproportionate Share program (shortened to "Dispro") because the federal reimbursements were predicated on a hospital having a "disproportionate share" of indigent patients. In its heyday, this program generated over $700 million in overcollections (profit) annually. Dispro overcollections were substituted for state funds in the hospital program, and the freed-up state funds were used to cover costs in other areas of government.

Louisiana was not the only state taking advantage of the Dispro program, and within a few years after Louisiana got into the program in a big way, the federal government began phasing it out. The loss of the Dispro overcollections would have been a severe blow to the state budget had not video poker and riverboat gaming been phased in at the same time that Dispro was being phased out. Once again, the legislature would have been faced with making deep cuts in the budget or raising taxes if these new sources of revenue had not come on line.

From FY 95 to FY 98, the revenue base performed very well. The economy was kicking into high gear, and for that three-year period, the revenue base grew at a brisk pace. Unfortunately, this trend did not continue and by FY 99, there was an actual decline in revenue from FY 98. Were it not for the tax increases from the 2000 Regular Session, projected revenue for FY 01 would show a decline from the prior year.

These revenue problems are illustrated graphically in Exhibit A on the next page. The mineral revenue line from FY 82 to FY 01 shows that in FY 01 Louisiana will receive approximately $1 billion less than what it received from this source in FY 82. Mineral prices rise and fall based on the supply of oil and natural gas. Because of declining on-shore reserves, however, mineral revenue will never play the prominent role it once did in the tax structure unless a change is made to bring offshore and imported oil and gas into the tax base.

Mineral income is only one of a number of major taxes that are not growing sufficiently to support budget needs. Corporate income and franchise taxes are stagnant because of tax exemptions and tax loopholes; the gaming industry in Louisiana has matured and will only produce minimal growth in the future; and profits from the disproportionate share provisions of the Medicaid law have been eliminated altogether by Congress. The sales tax line is showing some upward movement in FY 01, but that’s only because a 1¢ sales tax was levied on food and utilities during the recently completed Regular Session. Internet and catalogue sales have begun to eat into sales tax collections. As electronic commerce matures the negative impact on sales tax revenue will increase. Congress has shown little sympathy for state and local governments on this issue and continues to postpone legislation that would give states the right to tax Internet and catalogue sales.

Of all major revenue sources, only the personal income tax is consistently increasing (see graph) without periodic tweaking by the legislature. Personal income tax receipts have grown by 629% percent since 1982. A portion of this growth was the result of a federal income tax reduction in the mid 1980’s (since federal taxes are deductible in computing state taxes, a reduction in federal taxes increases one’s state tax liability). However, most of the growth is attributable to the elasticity of this revenue source that consistently grows faster than the rate of inflation.