Fiscal Storm Looms for Louisiana

Amid the Gulf Coast’s struggle to dry out and clean up, the impact of Hurricanes Katrina and Rita on state budgets has started to come into focus — and it looks yet again as if Louisiana will take the fiercest beating.

Preliminary estimates of total lost tax revenue in Louisiana range from $1 billion to $3 billion, according to a Sept. 29 report from the Congressional Budget Office . Despite the devastation along Mississippi’s coast, where two-thirds of the population lives, the report cited a prediction from the deputy state economist that the storms’ long-term effect on the state’s budget will be negligible.

Significant revenue losses also are unlikely in storm-struck Alabama and Texas, according to the report.

In Alabama, Mississippi and Louisiana, lost wages are expected to dampen income-tax collections, and concerns have been raised about whether local governments in the three states will be able to cover their debt. The report estimates that between $10 billion and $15 billion in outstanding debt in the three states is more likely to default because of the storms.

Louisiana officials are only beginning to discern how the state’s budget will be affected by Katrina, which struck Aug. 29 and drowned 80 percent of New Orleans, and by Rita, which two weeks later again battered the southern part of the state.

It’s still unclear how much and how long Louisiana’s revenues will suffer because of the storms. A legislative study that projects a $1 billion hole in Louisiana’s state budget for the 2006 fiscal year, which began in July, is more optimistic than some other estimates.

“Business closures, disruptions in corporate tax filings and the massive departure of tens of thousands of residents will disrupt both income- and sales-tax collections,” the report states.

Such disruptions will hit Louisiana’s budget hard; about 88 percent of its state revenue comes from sales taxes and incomes taxes, according to the Government Performance Project , which like Stateline.org is funded by The Pew Charitable Trusts .

Louisiana Gov. Kathleen Blanco (D), who canceled a four-nation Asian tour last month that in part had been designed to lure business to Louisiana, has appealed to Congress for help in rebuilding her state’s storm-battered economy. Blanco’s strategy centers on rebuilding businesses in her state. She has issued a proclamation urging that Louisiana companies be given first preference for state and local recovery contracts.

Blanco also has issued an executive order freezing most state hiring and spending. State officials are looking for ways to save money and could end up laying off some of the 6,000 state workers who have not contacted their employers since the storms.

Although Katrina virtually obliterated communities and casinos along the Mississippi coast, the congressional report predicts that income taxes collected as rebuilding gets under way will offset initial decreases in income taxes and gaming revenues.

Whether the federal government picks up the cost of repairing state facilities and meeting increased demand for services could determine how quickly the state has to take steps to stay financially afloat, according to the report.

The Mississippi treasurer’s office is projecting tax revenue losses between $213 million and $272 million in the fiscal quarter from September through December.  

Mississippi Gov. Haley Barbour (R) also has a plan to resuscitate the state’s economy. Barbour has called the state Legislature into emergency special session, urging lawmakers to pass business-friendly measures, including a no-interest loan program for small businesses. A debate is raging over whether casinos — technically required to be located on water — now should be allowed instead on land.

Katrina affected about a third of the state’s gaming facilities, which generate about 5 percent of the state’s total revenue. Prior to Katrina, casinos were generating $500,000 in state government revenue every day.

Alabama officials also do not expect any long-term revenue consequences, although the state is allowing individuals and companies in six hard-hit counties to delay income-tax payments due Sept. 15 until Jan. 3.

All three states anticipate that local governments, which rely largely on property taxes, will face more serious budgetary shortfalls than state government, according to the CBO. New Orleans Mayor Ray Nagin announced Oct. 4 that the city will lay off half its municipal work force. Large portions of the city could prove unsalvageable, perhaps permanently eroding the city’s tax base. Louisiana counties affected by the storms usually collect $1.3 billion in property taxes and $1.8 billion in local sales taxes.

“At the state level, they’re very confident that they can weather the storm. But the fear is that local governments don’t have the same resources to tap into,” said Sujit CanagaRetna, a fiscal analyst with the Council of State Governments , a bipartisan umbrella organization for state government officials.

The nation’s three major bond-rating firms, which help determine the price state and local governments pay to borrow money, are keeping a close watch on state and local revenues in the Gulf region but have not yet downgraded any state or local credit ratings.

While Louisiana, Mississippi and Alabama officials fret about lost wages resulting in part from displaced residents, officials to the west in Texas, which absorbed the majority of Katrina evacuees, are wondering how to pay for services for the new arrivals. 

The city of Austin, for example, spent an estimated $2.7 million in less than two weeks trying to meet the needs of 4,000 evacuees, according to CBO.

Nationally, the hurricanes are projected to slow the growth of the gross domestic product during the second half of the 2005 calendar year by one-half of 1 percent, according to CBO’s report.