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A Fiscal and Political Watershed

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Louisiana lawmakers return to Baton Rouge this week to begin the final legislative session of Gov. Kathleen Blanco's term. This year's session, which must end by June 28, will be largely though not exclusively focused on fiscal issues. The major debate will be what to do with state government's newfound wealth. Louisiana already has an $827 million surplus from the previous fiscal year, and the current fiscal year (which ends June 30) is expected to produce more than $1.2 billion in unanticipated revenues. Next fiscal year, Blanco projects an additional $1.3 billion. That's roughly $3.3 billion in "new money" for lawmakers to spend -- in an election year. Interestingly, lawmakers will be pulled in two directions at once. One temptation will be to "give the money back" to taxpayers in the form of huge tax breaks; the other will be to "bring home the bacon" by spending the money on local projects. We think that too much of either is a bad idea.

Last week, Blanco outlined her fiscal proposals. They include modest tax breaks and large "investments" in roads, higher education, teacher and state employee pay, cops and firemen, and health care. Those are Louisiana's traditional budgetary priorities. In making her case, the governor divides the "new" money into three categories: the $827 million surplus, the $1.2 billion in current-year additional revenue and the $1.3 billion in additional foreseeable revenue in the coming fiscal year. She proposes to spend the surplus on large, one-time items in the form of $400 million for roads, $200 million for coastal restoration, $100 million to lure a steel mill to St. James Parish, and $77 million in "deferred maintenance" at colleges and universities. We support that idea. Surplus funds should not be used to meet recurring needs, and each of the governor's proposals represents a significant, under-funded priority.

That leaves the question of what to do with this year's and next year's additional revenue. For starters, we think the governor and lawmakers should not consider this year's anticipated additional revenue as "recurring" in nature. That is, those revenues should not be used for recurring expenses. Instead, they should either be rebated to taxpayers or used for other one-time items -- such as reducing Louisiana's debt (including its unfunded accrued liabilities), additional highway projects, capital projects relating to education, or hurricane recovery projects.

Looking to next year, the governor proposes $133 million in future tax cuts and more than $1.15 billion in additional spending. The governor calls her spending plan an "investment" in Louisiana's future. We think the ratio of spending-to-tax cuts is way too high. We don't necessarily disagree with the list of needs that she has put forth; rather, we suggest that many of those needs -- including pay raises for teachers, public employees and first responders -- can be addressed by tightening current spending practices.

Blanco's proposed tax cuts include a refundable child tax credit and a half-cent decrease in the sales tax that businesses pay on utilities. She would not tinker at all with the so-called Stelly Plan, which substituted individual income taxes for sales taxes on food, groceries, prescriptions, and residential utility bills. In our view, her plan doesn't go far enough.

This newspaper supported the Stelly Plan, and we continue to support the concept of basing state revenues on income taxes rather than sales taxes. At the same time, we also support the idea of Louisiana's income tax code tracking the federal tax code, particularly in the areas of allowable deductions and general tax policy. We therefore support proposals to allow individual taxpayers to deduct charitable contributions and home mortgage interest payments on their state income tax returns -- just as they are allowed to do on their federal returns. We also think businesses deserve the same break that individuals got under the Stelly Plan: removing all sales taxes from their utility bills.

But even that's not enough. We'd also like to propose something that we think is a new idea in Louisiana, one that likewise tracks federal tax laws: reducing the state tax on long-term capital gains. Federal tax laws favor the sale of capital assets that have been held for a year or more by taxing most long-term capital gains at no more than 15 percent -- as opposed to the top "ordinary income" tax bracket of 35 percent. (Some real estate gains are taxed at 25 percent, but that's still significantly lower than the top ordinary income tax bracket of 35 percent.) Louisiana, however, treats all long-term capital gains as ordinary income, taxing them at up to 6 percent (on top of the federal tax of 15 percent). A lower long-term capital gains tax in Louisiana would be "good for business" because it would encourage rather than discourage placing fixed assets back into commerce. Specifically, it would encourage redevelopment of land and buildings, along with business investment and growth. On a personal level, it would encourage residential and small commercial property sales as well as sales of stocks held for more than a year. Equally important, it would prevent moderate-income taxpayers from being catapulted into higher tax brackets just because they sell a long-held family asset.

The year's legislative session will be a fiscal and political watershed for Louisiana. Because of term limits, many lawmakers won't be returning. This session marks their last chance to leave a legacy. We think putting more money in the pockets of constituents is the best legacy any lawmaker or governor can leave.

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