Wednesday, June 12, 2024

Closer look at the revenue and spending projections between Gov. Edwards and Republicans

by BIZ. Staff
By Drew White and Tryfon Boukouvidis, LSU Manship School News Service

BATON ROUGE–The special legislative session collapsed in part because some Republicans questioned Gov. John Bel Edwards’ projections of the state budget shortfall, and updated estimates this spring could be crucial to negotiating a solution.

Edwards started out trying to replace $994 million in tax revenue expiring July 1 to avoid cuts in health care and higher education. He lowered that to $662 million after state economists predicted that the state will receive a $302 million windfall from federal tax changes.

Some Republicans contend, however, that the budget gap could be as low as $400 million. They argue that oil prices and the general economic growth rate could be higher than the state has forecast, bringing in more revenue, and that they could eliminate the rest of the gap by cutting spending.

Independent experts say that while estimates are subject to change, the governor’s numbers are probably much closer to the mark.

“Every past forecast – because you’re trying to forecast a hundred different revenue sources exactly as how they’ll come in – is bound to be off a little bit,” Jan Moller, director of the Louisiana Budget Project, a nonprofit group, said.

But Edwards’ projection was put together by economists working for him and the Legislature and “is the best Louisiana has figured out how to do,” he argued. “And it is certainly better than politicians guessing what the price of oil is going to be.”

Robert Travis Scott, president of the Public Affairs Research Council of Louisiana, agreed that

the legislators “should listen to what their analysts are saying.”

Top Republicans, including House Appropriations Committee Chairman Cameron Henry, R-Metairie, have challenged the official state projections, which are made by the Revenue Estimating Conference, over the last couple of years. Conference members include the president of the state senate and the speaker of the House, both Republicans; Edwards’ commissioner of administration, Jay Dardenne, who is also a Republican; and an LSU economist.

The conference sets state income forecasts based on the recommendations of the administration’s and the Legislature’s top economists, and it plans to update its forecasts later this spring.

Rep. Alan Seabaugh, R- Shreveport, one of the most outspoken Republicans, believes that oil and gas severance taxes and royalties could bring in $144 million more in the next fiscal year than the conference estimated in December.

He also maintained that the projections do not fully account for the stimulus from the federal tax cuts and that higher economic growth than anticipated could bring in an extra $100 million to $125 million.

Before the special session collapsed, Seabaugh repeatedly criticized the governor for calling it, saying, “What’s the urgency?” He suggested waiting for the spring estimates.

Seabaugh and other Republicans noted that the revenue conference could still adjust the $302 million estimate of the windfall that the state will receive from the federal tax cuts as well. Individual taxpayers can deduct their federal taxes on their Louisiana returns, so the federal cuts will reduce the value of the deductions and increase their state tax bills.

State economists also are still trying to estimate whether the federal tax changes will affect how much Louisiana collects in taxes from corporations.

But the Legislature’s regular session starts Monday, and it will have to make large spending cuts to balance the budget since it cannot consider tax measures without having another special session in June. And if lawmakers wait for the revenue conference to update its estimates “in the middle of a regular session where you’re required to pass a budget,” Rep. Barry Ivey, R-Baton Rouge, said, “there’s no ability at that point to actually do so.”

GOP legislators accuse Edwards of only wanting to raise taxes, but Edwards says the state will lose $1.38 billion in revenue when temporary tax measures expire on July 1. State economists estimate economic growth will offset $266 million, and he said he is prepared to make $120 million in budget cuts.

Lawmakers in both parties expect a second special session to address the cliff with a combination of cuts and revenue-raising proposals. But the exact mix could depend on the results of the conference’s updated projections of oil prices and economic growth.

Moller, the Louisiana Budget Project director, said legislators’ rough calculations of the price of oil are a “page from the old Edwin Edwards playbook,” which involved the former governor creating whatever estimates he wanted to justify the spending he planned. Louisiana later created the Revenue Estimating Conference to stop this practice.

Last December, the conference increased its overall state tax revenue forecasts. A Legislative Fiscal Office report states that severance crude oil price projections were only modestly upgraded for the current year – from $51.14 in May to $51.78 a barrel. It also project that the price will rise to $54.31 in the new fiscal year that begins July 1.

Oil prices are currently forecast to be slightly higher, but the conference warns that out-year forecasts should be taken with caution and that it is better to underestimate tax collections than run into an unexpected shortfall in the middle of the year.

Currently, oil is trading around $62 per barrel for West Texas Intermediate (WTI), a grade of crude oil used as one benchmark in oil pricing. The Revenue Estimating Conference bases its projections on an average of WTI projections by Moody’s, a company that analyzes financial markets; the Energy Information Administration; and the State Department of Natural Resources.

Seabaugh contends that a $1 increase in the average price of a barrel would add $12 million to the state budget, or an additional $140 million unaccounted for in the governor’s projection.

But Manfred Dix of the Louisiana Office of Planning and Budget said the state’s oil royalties have dropped substantially in recent years, and he does not expect revenue to increase significantly even if the projected oil price rises.    

Moller said that waiting for updated estimates also created too much uncertainty for companies and residents. “People are making decisions to go or stay in Louisiana right now,” he said. “The forecast is not going to change so dramatically that it would reduce the importance of the Legislature voting today to stabilize the budget.”

But, he said, some lawmakers “don’t want to tax voters and don’t want to tell you what they’re willing to cut out of the state budget. They want a free lunch.”

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