Louisiana Stares Down Budget Hole as Temporary Taxes Near Expiration

Louisiana lawmakers are scrambling to find a long-term fix for a looming fiscal crisis and avoid deep spending cuts, before $1 billion in temporary tax measures expire next year.

Democratic Gov. John Bel Edwards's coming budget proposal will have to include "devastating cuts," said Jay Dardenne, the governor's chief budget officer. That would add to deep reductions the state has made in recent years to higher education and to child-welfare and other state agencies, unless lawmakers strike a deal to replace the lost revenue to help fill a budget hole that is estimated to reach $1.5 billion when the new fiscal year begins.

At issue is the end of a series of temporary taxes put in place two years ago to stave off a fiscal emergency. While these measures prop up state revenue, lawmakers have yet to figure out how to replace them.

Time is running out on a long-term fix. Louisiana law prevents legislators from adding new revenue in next year's regular legislative session, starting in March, so Mr. Edwards would like a special session to finalize a deal before then.

"We are dangling over the cliff," said Mr. Dardenne, a Republican and former lieutenant governor. "We can't just dawdle around and wait for the very last minute."

Mr. Edwards, who blamed state House Republicans for not acting on budget measures earlier this year, is urging a permanent fix and not an extension of temporary taxes. Republican House Speaker Taylor Barras suggests a solution could include making permanent, or extending, some of the taxes now set to expire. Those measures include an additional penny of sales tax and reductions in tax credits. The governor and speaker have formed a bipartisan group to try to find a solution.

"The only way to address that shortfall is by either replacing the revenue or imposing deep budget cuts across state government," Mr. Edwards's office said.

Louisiana is a low-tax state with a long history of fiscal instability, tied in part to its reliance on volatile energy-industry revenue. An oil bust in the 1980s hammered the state, preceding a nearly two-decade run where lawmakers repeatedly used temporary sales-tax measures to plug budget holes, said Greg Albrecht, chief economist in the state Legislative Fiscal Office.

Other states across the U.S., including Pennsylvania, Connecticut and Illinois, have been roiled in recent years by persistent fiscal challenges. As in almost every other state, lawmakers in Louisiana are required to balance the budget.

The state instituted a measure in 2002 known as the "Stelly Plan," named for former Republican State Rep. Vic Stelly, which eliminated sales taxes on goods and services like presciprtion drugs and residential utilities while raising income taxes on both middle- and higher-income filers. The plan was criticized by fiscal conservatives who said income-tax increases stymied economic growth, but it helped calm the state's persistent imbalances, Mr. Albrecht said.

After Hurricanes Katrina and Rita hit in 2005, billions of dollars in federal aid helped stimulate the state's economy, Mr. Albrecht said. High oil prices also helped, and the state was flush with cash.

Lawmakers responded with tax cuts, dismantling key revenue-generating parts of the Stelly plan, first under Gov. Kathleen Blanco, a Democrat, and the next year under GOP Gov. Bobby Jindal.

Ms. Blanco in an interview said she reluctantly approved partial revenue cuts because of pressure from legislators seeking reelection, but said they made "a big mistake." Mr. Jindal didn't respond to calls for comment.

Mr. Stelly, a retired 76-year-old, said lawmakers made shortsighted policy moves with excess revenue they knew wouldn't last. "If your Uncle Joe dies and gives you $10,000, can you just put that in your budget?" Mr. Stelly said. "If Uncle Joe doesn't die every year, you're going to be in trouble."

In early 2016, when Mr. Edwards took office, state spending "had chronically outpaced recurring state revenues," according to a January report from a fiscal task force created by the legislature.

Adding back any taxes today is a tough sell for fiscal conservatives in the state, said Jan Moller, who directs the nonprofit Louisiana Budget Project, a group that advocates for low and moderate-income families. Nearly all revenue-raising moves in Louisiana require two-thirds support in the legislature.

Mr. Edwards backed wide-ranging recommendations by the fiscal task force, which include eliminating or lowering a state deduction on federal income taxes paid. His office stressed that he wants to replace revenue from expiring sources but doesn't want a net increase in taxes.

The task force called spending cuts alone an unrealistic fix, and it also said extending temporary tax measures would invite yet-more uncertainty.

"Clearly a structural, long-term solution is preferable to stopgap solutions," said Marcia Van Wagner, a senior credit officer at Moody's Investors Service.

Ahead of the January release of the governor's next budget proposal, state workers say they are worried about more cuts. "The stress level has really gone up," said Karen Myers, a sergeant-master for a Louisiana Department of Corrections prison.

The state's public colleges and universities have already absorbed major hits, with general fund support for higher education dropping to $738 million in the current fiscal year, just over half the level of nine years ago, according to the Louisiana Board of Regents.

The state's Department of Children & Family Services, which lost about 600 child-welfare workers because of cuts since 2008, is also concerned about the state's latest unsolved fiscal problem, according to department secretary Marketa Garner Walters.

"Every single cut is in the marrow now," she said.

Write to Jon Kamp at jon.kamp@wsj.com and Cameron McWhirter at cameron.mcwhirter@wsj.com

(END) Dow Jones Newswires

November 28, 2017 08:14 ET (13:14 GMT)