Non-profit that studies rainy-day fund policies sends recommendations to La. amid tax reform session

NEW ORLEANS (WVUE) – As Louisiana lawmakers review Gov. Jeff Landry’s proposed tax reform package, the non-profit Pew Charitable Trusts has provided recommendations for consideration.

Pew suggests that Louisiana needs strong rainy-day policies to address the state’s historical revenue volatility.

Josh Goodman, senior officer of Pew’s State Fiscal Policy Project, expressed interest in Landry’s plan to consolidate the Budget Stabilization Fund (BSF), also known as the “rainy-day fund,” with the Revenue Stabilization Trust Fund.

He told FOX 8, “Part of what we really emphasize is the state needs to be looking out multiple years into the future as it designs this tax reform, and just in general, to see, you know, what do we expect our revenue to be? What do we expect spending to be?”

Louisiana faces a projected $700 million budget shortfall next year. Landry’s reform package proposes cutting state income taxes and imposing sales taxes on a broad range of services, such as car washes, landscaping, pet grooming, and lobbying.

Pew’s research found that from 2007 to 2022, Louisiana’s tax revenue volatility was slightly higher than the national average and more pronounced than in most neighboring Southern states.

During this period, Louisiana’s volatility score was 7.7, meaning that the growth rate of total tax revenue fluctuated 7.7 percentage points above or below the average.

“So if you think about the main taxes that both Louisiana and other states rely on, it’s income taxes. And so if there’s a recession, if people’s incomes fall, you have less income tax revenue, sales taxes,” Goodman explained. He and his team also compared Louisiana’s rainy-day fund to those in other states, noting, “What we found, though, is that Louisiana’s rainy-day fund is smaller than most other southern states and most states across the country. And so that’s where this whole question of like, how much do we need to save? Are we setting the cap of the rainy-day fund at the right level is really important in a state that’s probably saved less than most other states.”

To strengthen Louisiana’s financial stability, Pew’s memo to state leaders outlines four recommendations:

1. Conduct a Budget Stress Test: Pew suggests Louisiana use a budget stress test to calculate how much should be saved for challenging financial times. “And what a budget stress test does is it says if there’s a recession, how will that affect our budget? How much will revenue fall? How bad of shape will we be in?” said Goodman. This test, he noted, could help Louisiana assess whether it has enough in its rainy-day fund or needs additional savings.
2. Deposit Temporary Revenues in the Rainy-Day Fund: Goodman advised that surplus revenue should go into the rainy-day fund, explaining, “This is where, like, the idea with a rainy-day fund is you take revenue that you don’t expect to continue, and you set it aside for when you need it in those years when revenue drops. And that really does two things. One, it makes you more prepared for those bad years, but it also keeps you from establishing a level of spending you won’t be able to sustain.”
3. Set Goals for Reserve Funds: Goodman highlighted the importance of defining specific purposes for reserve funds. “We think this is really important because it’s hard to figure out how much to save unless you know why you’re saving money, what you’re doing this for?” he said. He also noted that Landry’s proposal to merge the rainy-day fund with a separate reserve fund raises questions about each fund’s unique objectives.
4. Conduct Long-Term Budget Assessments: Pew recommends long-term assessments to evaluate Louisiana’s fiscal stability in relation to structural spending needs. “Where this tax reform conversation at least partially came from is Louisiana has this budget problem. It has structural deficits where, you know, there’s this temporary sales tax that’s set to expire, and that would lead to deficits unless something is done, either on the revenue side or the spending side,” said Goodman. He added, “And so as Louisiana makes these choices, it’s important to remember like this isn’t the last time the state will need to think about is our budget balanced over the long term?”

In closing, Goodman emphasized, “We don’t have a particular stake on, you know, raise this tax, cut this other tax, you know, those kinds of things. What we’re trying to make sure is states have good data to make decisions so that their budgets are sustainable.”

To read Goodman’s letter to Louisiana policymakers: https://image.pewtrusts.org/lib/fe8215737d630c747c/m/1/1076c889-6bf0-483b-bc82-7dbb6e4396b2.pdf

Landry’s office did not respond to a request for comment.

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