Is Another Fiscal Cliff Coming?

Louisiana’s Joint Legislative Committee on the Budget, the committee of state lawmakers that meets throughout the year to approve state budget-related items, recently met to review the latest five-year budgetary projections. As expected, it doesn’t look good, but it’s important to understand why.

Let’s take a quick jog down memory lane.

In 2016, lawmakers were facing billion-dollar budget deficits, or “fiscal cliffs,” where state revenues were not available to fund planned expenses. To address this, they passed a temporary one cent state sales tax, bringing it from four cents to five, with the idea that when it expired two years later, they would have the state’s fiscal house in order. When 2018 rolled around, revenue forecasters panicked once again because the expiration of the temporary sales tax meant a “deficit” of about $1 billion dollars. In a last-minute compromise, the legislature agreed to reinstate the temporary sales tax until 2025, but only at 0.45 cent instead of one cent like before.

Here we are again, it seems. Louisiana is faced with the temporary tax expiring in a few years, and forecasters are showing another fiscal cliff when it does.

What’s really going on here, and what can be done to fix it once and for all?

This recurring problem is caused by a few factors:

1. Revenue projections are decreasing. Economic forecasters have been incredibly conservative in their revenue projections, particularly in the last few years because of the uncertainty surrounding the pandemic and the large sums of federal funding still flooding the economy. Forecasters have been predicting this boom in revenue to come crashing down for the last two years, and it hasn’t slowed down yet.
2. Revenue forecasters have underestimated the economic impact of the state’s 2021 tax reforms. These tax changes, which went into effect at the beginning of 2023, lowered rates and removed some complexity. Reports show that revenue is still at higher-than-normal levels, indicating that these forecasts are extremely conservative.
3. The expiration of the 0.45 cent temporary sales tax increase means a reduction in approximately $400 million in revenue annually. However, revenues have increased by far more since the first temporary tax was put in place in 2016.

But revenues are only half of the equation. Expenditures matter too, and just as much.

In order to build the state’s revenue and expense forecast, Louisiana uses a continuation budget that simply identifies the amount of money it will cost to fund current budget expenditures in future years given anticipated personnel costs and inflation. It does not identify the state’s biggest needs or priorities, nor does it identify which currently funded programs and activities are working well and achieving positive outcomes worth continuing. It simply assumes that all current expenditures are needed and must be continued.

This budget is then finalized based on several factors:

1. The continuation budget funds inflation, which is never funded in an actual budget.
2. The continuation budget shows Medicaid expenses growing by an additional $675 million (funded through the state’s general fund) by fiscal year 2027. It’s worth noting that this growth is anticipated when state officials are reporting that up to 250,000 currently ineligible Medicaid recipients will be removed from the rolls now that COVID-era rules have expired.
3. State education expenses are continuing to increase as the state continues to fund new and expanded initiatives as well as salaries for local employees with associated increasing retirement expenses. What’s noteworthy here is that public-school enrollment is actually continuing to drop.
4. State agencies like Wildlife and Fisheries that had been completely self-funded before by fees they collected are spending more than they take in and need infusions of tax dollars to maintain operations.

Furthermore, as spending has increased, Louisiana’s population has continued to decline over this same time.

It’s been well known that the sales tax increase was temporary and intended to serve as a cushion while lawmakers work to prioritize government spending and regain fiscal control. However, when presented with an opportunity to do just that in the last legislative session, they instead chose to spend every dime they took in, even as revenues increased to record levels.

Pelican has proposed a plan to rein in this excessive growth in spending, called the Responsible Louisiana Budget. It calls for restricting the growth of the state’s budget to population growth plus inflation, which is a much more responsible way to budget and determine the size of government taxpayers are able to afford. Continuing to kick the can down can’t be the solution, and taxpayers are growing tired of hearing the same Chicken Little cries for more tax dollars. Lawmakers should implement this plan immediately to bring spending under control to once and for all stop this unnecessary “boom and bust” revenue cycle in which the state finds itself every few years. Leadership is what is desperately needed to get the state’s fiscal house in order, and the sooner this can be done, the sooner Louisiana can begin to transition from reactive budgeting to proactive planning for a prosperous future.