Floods worsen battered economy
Louisiana still reels from the oil bust, deep budget cuts
Five days after being plucked with her 8-year-old son from an attic by police in a fishing boat, Leslie Grover was picking through the remains of her one-story house on a cul-de-sac in Baton Rouge, La., looking for serial numbers on appliances that would all need to be replaced.
A family of frogs had taken up residence behind the television. The shock lingers, like the silt coating the floors.
“There is nothing more mentally disturbing than to see only the roof of your house,” Taylor said. “There is nothing like watching your belongings and your memories float away.”
There’s no good day for a historic flood, but this one came at a particularly hard time for Grover, her neighbors and Louisiana, reeling from the oil bust and a series of deep budget cuts and increased taxes that have tried to stabilize a teetering
state government and economy. Despite a broadening economic expansion across the nation, Louisiana has lost nearly 25,000 jobs since the peak of the oil boom in 2014 while unemployment has climbed above 6 percent — more than 1.5 points higher than the Texas rate and more than a point higher than national average.
Underlying the weakening economy has been a relentless fiscal crisis, which, brought on by years of corporate giveaways and mismanagement, has advanced like a slow-moving natural disaster, battering hospitals, schools and social services. Between 2008 and 2015, the state laid off about 10 percent of its workforce and cut 7 percent in general fund spending, including 45 percent of funding for higher education, providing a cautionary tale for other states seeking to build local economies with generous corporate incentives.
Today, with its treasury reserves drained by years of neglect, officials say that Louisiana will likely need a short-term bank loan to pay for ongoing government operations. Although Gov. John Bel Edwards has said that the state’s response to the flooding won’t be constrained by its fiscal situation, he acknowledged the costs could be “huge.” Ripple effects
Grover’s experience, in many ways, captures the forces that have buffeted her adopted state. Granted, she’s among the lucky ones: She has flood insurance, but it won’t fix her grandmother’s beloved 1971 Ford Torino, or the antique dresser that had been passed down through her family and lay cracked and swollen beyond repair.
She has a steady job as an assistant professor of public administration at Southern University, a historically black public college north of downtown Baton Rouge. But the never-ending budget shortfalls have led to scores of layoffs of faculty and staff, tripling her class sizes and pushing the school of the brink of closure earlier this year before emergency funding came through. Even before the floods, elevators weren’t working and some classrooms had mold.
Grover has also started to see the ripple effects of the oil bust in the lives of her students.
Wages decreased 4.3 percent in nearby Lafayette Parish in 2015, the epicenter of the state’s oil services economy, by more than any other county in the nation — other than two in the heart of the Texas oil patch, Midland and Ector counties. And now, she worries that many won’t be able to show up for the start of classes, or even get to a computer to complete assignments online.
Robert Eisenstadt, director of the Center for Business and Economic Research at the University of Louisiana-Monroe, is not optimistic about the state’s economic fortunes. Evaporating revenues from oil and gas production have exposed a deeply dysfunctional tax system, which Eisenstadt says must be fixed if the state is to get back on track.
“We can talk about work ethic and how much we love business and industry,” he said. “But in the absence of a stable public environment, not least of which is education, transportation and labor force, those things are strained at best.” Swiss cheese tax code
The problem for Louisiana is that its growth has come largely by attracting large-scale corporate investments through multimillion dollar grants and tax abatement, leaving its tax code so riddled with loopholes that Louisiana last year gave out more in credits and other incentives than it collected in corporate income taxes. Total tax collections have dropped by 8 percent over the past seven years, to $7.5 billion, while exemptions rose 41 percent, to $5.7 billion.
The Swiss cheese tax code left the state with a budget shortfall of $2 billion — 8 percent of the $25 billion state budget — at the beginning of 2016. In a series of extraordinary legislative sessions this past spring and summer, the Legislature had to raise the sales tax higher than any other state just to keep the lights on.
“The state literally writes checks to corporations, instead of collecting revenue,” said Jay Dardenne, the state’s commissioner of administration. “Regardless of your philosophy of whether we have too much in tax revenue or not enough, you should not be in the business of devising a tax system that is this nonsensical.”
The state’s newly elected Democratic governor, Edwards, has resolved to overhaul the rest of the tax code so it supplies the state with enough income to meet its expenses and corrects some of the historic inequities that have left a few with bearing the burden of many.
But the odds aren’t in his favor. Every loophole has its constituency — real, lasting reform has eluded every Louisiana governor who’s tried it before.
And now he’s got a 20-parishwide disaster zone to deal with as well. No easy task
To understand why it’s so difficult to balance the books in Louisiana, consider what it takes to raise taxes.
Any tax hike requires approval from two-thirds of both legislative chambers, and sometimes even a change to the state constitution, which must be put to a popular vote. Take the provision that allows taxpayers to deduct federal taxes from their state taxes, one of only six of its kind in the nation, which is projected to cost Louisiana $845 million in 2016. Or the homestead exemption, which lets the first $75,000 of a home’s value to go property tax-free.
“The process is way out of the norm,” said Meg Wiehe, state tax policy director at the Institute for Taxation and Economic Policy.
That’s not to say governors haven’t tried to rationalize the tax code. In 1987, after a severe oil downturn blew a hole in the state budget, Louisiana State University economists released recommendations for reform aimed at relieving the constant state of fiscal crisis, including lowering the sales tax and making the property tax apply to more people. When Gov. Buddy Roemer tried to implement them, however, his proposals failed on a popular referendum.
In 2002, voters passed a constitutional amendment to lower the sales tax and increase the personal income tax, an overhaul known as the “Stelly Plan” after Vic Stelly, the Republican congressman who devised it.
But a few years later, two things happened: First, Hurricane Katrina brought a flood of federal aid into Louisiana, which lingered in its budgets for years. And second, a new oil boom boosted tax revenues to the point where the state had a $1 billion surplus.
Facing pressure from voters who now felt overtaxed, legislators voted to repeal the incomeraising part of the Stelly Plan in 2008. As the federal aid dried up and oil prices deflated, the surplus melted away. By that time, then-Gov. Bobby Jindal had taken a hard-line stance against new taxes and raided every pot of money he could to balance the budget each year — mostly with the acquiescence of the Legislature.
To an outsider, Louisiana might have appeared to be doing just fine. It climbed in the rankings for its business friendly climate in publications, as scores of companies announced new investments and expansions in the state. But they were given hundreds of millions of dollars in grants and tax abatements in ex- change. A2015 review of those incentives by economists at Tulane University in New Orleans found that they “do not generate benefits anywhere close to their costs.”
Facing rapidly declining revenues, Jindal put the state government on a starvation diet. In order to keep costs in line with income, some departments, like the Department of Children and Family Services, lost a quarter of their employees. The state’s contribution to K-12 education was frozen for six years at the minimum amount allowed by law. The state’s university system was cut more than any in the country, sending tuition up 67 percent between 2008 and 2015.
“Every staff person at that university is doing two or three jobs,” said Bette Kauffman, a professor of communications at the University of Louisiana at Monroe.
That’s the Catch-22 of economic development: Plenty of corporations will come to your state if you pay them enough. But at a certain point, that starts to defeat the purpose.
“The previous administration did a lot to get economic development going,” said Ronnie Harris, director of the Louisiana Municipal Association. “The problem is, he spent all of the incentive money to get them here. So yes, we’re starting to feel the pain.” Feeling vulnerable
After Jindal left office in 2015, the Legislature scrambled to fill the budget gap that he had left, cutting the state’s prized scholarship program for high-achieving high school students by 30 percent and adding a penny on the dollar to sales tax.
All of that made state residents like Diane Hanley, the director of a Catholic spirituality center, start to feel extremely vulnerable. A family member relies on state aid for around-the-clock care and her son receives a scholarship to a state university. Arecent increase in the sales tax, to 10.1 percent from 9.1 percent, made her $7,000 air conditioner replacement even harder to stomach.
“If we were to have the perfect storm of state cuts, we’d be devastated, and we’re middle class,” Hanley said. “Whoelse is paying? Why are we the ones who keep getting hit with this? How else can this be done?”
Hanley is also a leader of Together Louisiana, a coalition of churches and civic groups seeking to improve social and economic conditions in the state. Earlier this year, the coalition and its members turned their attention to the tax code. They found one thing could be done fairly quickly: Reforming the industrial tax exemption, a constitutional provision that since 1936 had allowed a state board to exempt new manufacturing facilities from local property taxes for 10 years, substantially shrinking the parishes’ tax base.
Edwards, who had the power to change the program without seeking legislative approval, wasted no time in doing so, giving parish leaders the ability to reject corporations’ requests to be let off the hook.
Going further, however, is going to be much more difficult.
Edwards’ opening bid will come on Sept. 1, when a task force that has met for months releases its blueprint for reform. It’s expected to hew closely to a report offered last year by the nonpartisan Tax Foundation, which recommended that most exemptions be limited or stripped out entirely in favor of a lower, flatter corporate tax rate.
In principle, business lobby groups are in favor of a simpler tax code — especially small businesses, which haven’t benefited to the same degree from all those tax breaks. That doesn’t mean, however, that they’re on board with higher taxes overall. Dawn Starns, director on the state chapter of the National Federation of Independent Businesses, the small business lobby, said she’s not convinced that the state has truly rooted out all the waste in its operations. Look west
In the whole debate over taxes, there’s one state that’s most often mentioned: Texas.
The mega-state to Louisiana’s left also has a booming petrochemical industry, hyper business-friendly government and burgeoning population. That’s why Dan Borne, president of the Louisiana Chemical Association, said the state needed all those tax breaks in order to hold its own.
As he put it to a local Rotary Club in July: “Texas knows that when the investment incentives are at parity, Texas wins. Sure we have the river, but Texas has scale that mocks every other industrial area in the United States.”
But here’s the funny thing about Texas, despite having no income tax, its overall tax burden is actually the same as Louisiana’s — 7.6 percent of the state income in 2012, according to the Tax Foundation — because of high property taxes and a few extra taxes on business. The key to its attractiveness lies in the relative simplicity and consistency of those tax rules, which Louisiana seems to change substantially whenever the Legislature is in session.
And there’s another difference between Texas and Louisiana: Its ability to aid residents in a natural disaster. Although Texas’ disaster relief fund was strained by the devastating flooding in Houston this spring, it’s easier to appropriate money when you’re not in a constant state of fiscal crisis. And the unprecedented deluge will require lots of money: Louisiana has burned through $13 million in the first week and expects to spend many millions more as it cleans up state buildings, replaces vehicles, pays for shelters, fixes roads and keeps the National Guard on duty.
“It you have a budget that’s constantly weak because of poor cash flow, when you run into a problem like this, it makes it more likely that you’ll have to do short term borrowing to pay your bills,” said Robert Travis Scott, a member of Edwards’ budget task force. “When you know you’re going to have more tragedies happening, it’s all the more important to get a good long term, sustainable fiscal structure so when you do run into catastrophes you’re equipped to deal with them.”