Louisiana economy struggles with reliance on oil and tourism, analysis shows

Despite historic declines at the beginning of 2020 as the novel coronavirus spread and slowed the economy, tax revenues for most states rebounded by the end of the year to near pre-pandemic levels — but not for Louisiana. An analysis released Monday by Pew researchers sheds light on how Louisiana’s reliance on oil and tourism has hampered its economy compared to states with more diverse markets, and one of the state’s most prominent economists said recovery will remain sluggish until Louisiana makes “significant improvements” into other sectors.

A state fiscal health analysis conducted by the Pew Charitable Trusts shows that by the end of 2020, total state tax collections nationwide had recovered to just 1.9% below their pre-pandemic levels after adjusting for inflation. Furthermore, 20 states had rebounded fully — posting greater receipts in 2020 than in 2019.

Fourth quarter performances were overall very healthy — reaching levels that surprised forecasters, said Justin Theal, an officer with Pew’s state fiscal health policy team. The numbers are in stark contrast with the steepest plunge seen in at least 25 years during the second quarter, when most states went on lockdown.

But while most states’ tax revenues rebounded to near pre-pandemic levels, Louisiana’s did not. By the end of the year, the Pelican State’s total 2020 tax revenues were 4.2% below pre-pandemic levels.

“Something that really stands out to me about Louisiana is the state’s tax revenue was hit just as hard as the national trend,” Theal said. “The state saw about a 25% decline in revenue for the second quarter; however, Louisiana’s recovery has been much weaker than other states.”

LSU economics Professor Jim Richardson, who served 30 years as the economist on the Louisiana Revenue Estimating Conference, said Louisiana’s sluggish economic recovery is largely due to its reliance on the oil and gas and tourism sectors — the two major industries hit hardest by the pandemic. The oil industry had started to slump even before January 2020, and that slump was made worse by the pandemic.

“Two elements to the economy that took a disproportionate disruption were the oil and gas sector and the tourism sector,” Richardson said.

The construction sector also suffered, particularly when large industrial construction projects halted during the pandemic, he added.

In a July 2020 interview with the Illuminator, Richardson predicted Louisiana would experience this slow recovery, citing the same reasons that the Pew researchers cite in their recent study.

Still, Louisiana fared better than other outliers such as Alaska, Texas, North Dakota and Wyoming — states whose economies also rely heavily on the fossil fuel industry. Alaska has had it the worst with a 34.4% drop.

“One bright spot is that Louisiana’s performance in the final quarter of 2020 was positive,” Theal, the Pew researcher, said. “That’s significant because there was historic if not unprecedented volatility during the second and third quarters.”

Among the factors that drove fourth-quarter recoveries across the country were the massive amounts of federal aid and the unequal impact the virus had on socioeconomic classes. Theal said most higher income people remained employed during the pandemic, so states with larger professional job sectors tended to have easier recoveries.

Louisiana, on the other hand, lost more jobs than any other state during the pandemic, according to Bureau of Labor Statistics data presented in a new Pandemic to Prosperity report released Wednesday.

Longer-term outlooks for tax revenues remain uncertain, particularly with federal aid programs coming to an end alongside recent surges of the COVID-19 Delta variant. Another point of uncertainty lies with tax cuts enacted by some states, Theal said.

On Monday, Louisiana had the largest surge of coronavirus cases per capita in the nation, and this summer, state legislators passed income tax cuts, though those cuts are designed to be revenue neutral and must still be approved by voters.

“It’s just unclear at this moment how the Delta variant will affect the fiscal outlook for the states,” Theal said. “One thing that is striking when I look at Louisiana’s long-term tax revenue trend is the state never fully recovered from its declines in the Great Recession.”

Richardson, the LSU economist, said Louisiana’s rate of recovery may not improve until the state diversifies its economy because the oil and gas sector is not growth oriented.

“I think from that angle we need to make some significant improvements in our economy,” he said. “That doesn’t mean we need to totally leave oil and gas. I think we need to enlarge our economy and extend into other sectors.”

He pointed to other southern states like Georgia, which have larger professional services sectors such as health care and technology. Georgia’s 2020 tax revenue grew 1.5% above its pre-pandemic level.