Tax Cuts And Increased Spending Point To Revenue Needs

This week’s Courier Herald column:

The muted lull between the Georgia General Assembly’s March Sine Die and the January 13th reconvening of legislators has been relatively quiet publicly.  Behind the scenes, there has been a philosophical and practical struggle over Georgia’s budget – all within the ranks of the majority Republican party.

In late summer, Governor Kemp requested most state agencies prepare cuts of 4% to current year spending and 6% for next year’s budget in the event of a possible downturn in tax revenue collection.  The Governor also wants to continue to deliver on his pledge to give educators a $2,000 pay raise to complete his pledge of $5,000 total.  Then there’s the matter of another state income tax cut that is scheduled to kick in next year.

Georgia’s budgets have to balance every year.  New spending and cuts to revenue means either cuts to spending elsewhere, or new revenue streams must be identified.

It’s not unusual to see some friction between new elected officials in the executive branch wanting to demonstrate results to voters who feel “taxed enough already”, and a legislature that has spent the last decade digging out from a recession who has put the lion’s share of revenue growth into K-12 education, transportation infrastructure, and growing healthcare costs.  There have been few frills along the way.

Legislators do have numbers to refute any claims that they have been big spenders.  According to the Federation of Tax Administrators, Georgia ranks 43rd in state taxes collected per capita. When local taxes are also figured in, Georgia ranks 42nd according to the Tax Foundation.

State & Local Taxes Per Capita: Source, Tax Foundation

Georgia’s problem is that Republican primary voters want to grade the state on a curve.  Neighboring Florida, Alabama, South Carolina, and Tennessee take in less from state residents per capita than does Georgia.

Georgia is also the fourth fastest growing state in the country.  That puts us much closer in spending needs and infrastructure investments to North Carolina, which ranks 34th in state taxes per capita and 32nd when local taxes are included. 

Georgia’s elected officials are stuck in a difficult position where we continue to increase investment in our biggest areas of state spending, and need to demonstrate to their base that they are simultaneously decreasing the size of government. As an added pressure, they would like to maintain the state’s AAA bond rating to show they’re doing both prudently.

It would be much easier if there was a budget line item for “fat”.  Instead, many of the areas targeted for cuts are labor intensive.  Most state employees spent the last decade hearing “no money for raises this year” again and again.  Now, with a 3.5% unemployment rate, they’re not only hearing that raises are unlikely, but that furloughs are a strong possibility.  It’s going to be hard to retain the best and brightest under this scenario.

As legislators and executive branch staff begin to look at their options, it’s increasingly likely that additional revenues may be needed to pay for future income tax cuts.  “Broadening the tax base” remains an acceptable conservative solution to most when spending levels can be justified.

Options on the table with varying degrees of probability include increasing state cigarette taxes, which are the 48th lowest in the country and lower than all neighboring states – and almost $1 per pack below those in Florida.  Casino gaming is getting another long look, which would bring new revenues from a new employing industry without extending any tax incentives.  The longest of longshots would be expansion of marijuana legalization, which states like Colorado have demonstrated a stable new revenue stream.

New revenue sources aren’t yet the priority of anyone in this discussion.  As it becomes clearer that tax cuts combined with increased spending in the largest state budget areas would mean deep cuts elsewhere, a lot of other options will suddenly seem palatable to keep all the promises made while balancing the budget.

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