Short Term Budget Pain Can Still Lead To State’s Gain
This week’s Courier Herald column:
We’re almost two months into Georgia’s State of Emergency to address the issues brought to us by the Covid-19 virus. Our crisis is now one of public health and one of economics. As leaders attempt to simultaneously deal with both problem sets, it often appears we are still in search of answers. We need to make sure we are asking the right questions.
The legislature will reconvene, likely in mid-June, to pass a budget for the fiscal year that begins on July 1st. With income tax filing deadlines delayed until July and many businesses across the state closed and thus not collecting nor remitting sales taxes, it can be assumed that a large portion of the state’s $2.5 billion rainy day fund will be used just to pay the state’s bills through June.
There is hope that additional assistance will come from the federal government that will soften the blow to the state’s fiscal position. The state’s budget must balance, however, and there is not a line item for “hope” in the state’s revenue projection.
Cuts are coming. The current target is to fill a $4 Billion gap, or about 15% of the state’s current proposed spending plan.
The items for debate when the session began last January are no longer on the table. There will not be pay raises for teachers or other state employees. There will not be income tax cuts.
Fifteen percent reductions don’t leave sacred cows untouched. There likely will be reductions in services. Some positions will be cut. Furloughs should probably be expected.
There will be comparisons to the cuts that came during the great recession a decade ago. There will be pain, but there is also opportunity. Now back to those questions that the state needs to be asking.
State leaders used the aftermath of the great recession to prioritize future spending as well as focus on rebuilding Georgia’s economy. As conditions return to “normal”, Georgia needs to be positioned to be better, rather than the same.
During the last economic crisis, Georgia decided to focus on specific industries to diversity its economy. The state found it was too reliant on banking and real estate as evidenced by one quarter of the state’s banks failing, as well as the extended slump in residential home values. Those decisions are still paying dividends.
Georgia chose to place a renewed focus on manufacturing, and followed several initiatives to reduce costs for manufacturers as well as focus on Georgia’s workforce to ensure potential employees are ready when employers need them.
On Monday, SK innovations announced that it is going to start a second battery factory in Jackson County, on a site where they are nearing completion of their first US production facility. The $1.5 Billion investment is projected to create 2,000 jobs and according to the SK Group’s Vice-Chairman, make Georgia “the center of the battery industry for electric vehicles in the world”.
Another industry has anchored south metro Atlanta since the last downturn, also with a mix of help from Georgia’s tax code and investment in education and training programs. Georgia’s film business has grown from a cottage industry a decade ago to an international player, growing the number of Georgia based film crew members among the state’s employment ranks.
The film industry became a life line to communities hard hit by airline layoffs in the wake of 911 and the bankruptcies that followed. Competing performance audits have some lawmakers arguing against continuing tax credits given the state’s fiscal condition. With the current condition of the airline industry, those same lawmakers may wish to consider the timing of creating additional unemployment in these same communities while virtually ensuring a negative return on the state’s investment in the entertainment industry to date.
During the last economic recovery, the state focused education and training programs on industries and career paths that were in high demand. As Georgia considers across the board cuts, it should also take stock of which education investments create future taxpayers, and which ones seem to exist for the purpose of perpetuating bureaucracies and fiefdoms.
Georgia’s leaders have a lot of tough decisions ahead. Rather than sensationalizing the short term pain, we should all remain focused on making sure the state’s overall plan is a path to better days ahead.
Recessions come and go. State leaders need to ask themselves which budget items are relics of the past and should be cut, versus which appropriations put Georgia on the path for the quickest recovery, job creation, and economic expansion.
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There will not be income tax cuts.
Here’s a radical suggestion to help bridge the revenue gap of the coming years–cancel the recent income cuts which even pre-plague were a big reason for the 6 and 4% budget reductions that Kemp had mandated. Rescinding the cuts would add $400-500M annually to the state’s top line which would eliminate a lot of furloughs and fund a lot of capital expenditures.
I know the chances of this happening are near zero especially in an election year but maybe Kemp will decide that he really doesn’t want Georgia to be like Kansas and he really really doesn’t want to become the next Sam Brownback.
Given the makeup of the legislature/Gov’s office, I would say without getting into the merits that the response will be “now is not a time to ask more of Georgians who are struggling” and we both know that politically, it’s a non-starter, especially in an election year.
It will be interesting to see if there are any creative ways to regain state income. Pre-quarantine the film incentive was only under fire for inefficient audits. It happens, but usually a later audit gets back any unallowed refunds. The only proposed legislation was to have faster and better audits to avoid unallowed refunds. Not every film production gets to reap the full 30% incentive anyway.
I hope the legislature understands the film industry does generate revenue. Tens of thousands of workers paying income taxes on good wages. Thousands of regular businesses from food, retail, hospitality, equipment rental, housing rental, building services, vehicle rentals, etc. are keeping businesses and workers employed and also paying taxes.
I don’t know the competitive landscape of film tax credits well, but there is surely a balance point between a reduction of the tax credits such that it doesn’t fully offset any of the business’ sunk costs or long-term investments. Thus, even if that was a temporary 2% or 4% reduction, you retain the industry and competitive advantage. But once you figure out that number, you have to assess the risk, and whether the extra projected revenue is worth it. My guess is not’s much extra revenue for a risk accentuated by industry mobility.
One of the benefits/pitfalls of a tax credit such as the film tax credit is that it’s highly incremental, as (unlike the Kia/SK plants discussed below) the productions are highly mobile. If the credit is cut off, there will be $0 paid out in credits. There will also be thousands of jobs moved elsewhere, taking dollars spent in some of the state’s hardest hit service industries and small businesses with them. New Mexico is already taking some of our business, and they too are investing in infrastructure to take more:
https://www.bizjournals.com/atlanta/news/2020/03/11/netflix-stranger-things-film-outside-atlanta.html?ana=e_ae_set1&j=90499442&t=Afternoon&mkt_tok=eyJpIjoiTnpKbE1tTXdPVFJrWmpRMiIsInQiOiJwcWxDYURaTjZKUUVGa1ZHdFU4Qk1oUHdWTjJrU0luaWQwUmdiUlBoMWkzUm1FUXVFaENxNERURGljcWZ1d1EzM05JbVNXVUNlRTJmNDBiMEJtUWROemNYQTl1SnRCYjNwKzBvQ29uSXRrVGlUVjdEaG9EZFlXcXdQcHVZcE5TaiJ9
The industry at the moment is also shifting over to products that involve less people, like animation with voice overs, special effects, and exterior non studio shots. Video gaming will also be big. Not including the small exterior work, all of that can be done at home remotely. ALL OF IT.
Atlanta houses the largest digital special effects studios in the country. That would be a huge lose of high paying mid level growth jobs in the loop, and lose of network and potential education for the state tech schools, SCAD, and Georgia Tech and other state universities. Just the lost of SCAD students in the Savannah’s historic district – along with the film, photo shoots and the auxiliary business they support have been easy to witness in the downtown. The lost rent from students, the lose of 30 day Airbnb and retails for film staff is amazing (and not in a good way). Not to mention the census in the district will be under counted, as will some of the local college towns, like Statesboro.
https://gbpi.org/2020/state-leaders-must-prioritize-long-term-recovery/
“National surveys of consumer spending suggest a 25-to-50 percent drop in sales has already occurred across most major sectors with some projections of upwards of a 90 percent decline in revenues generated by key state employers like Delta Airlines, signaling that the state can expect a large and immediate decline in sales tax collections. ”
It will take a long time for employment to recover so it looks like the 2021 and 2022 fiscal years will be lean as well.
How about a ten lane toll booth on I-285? Since I do not go to Atlanta but maybe once a year I think it is a great idea. : )
The battery factory is a net $1.2B investment when its considered that 20% of it, $300M (per the AJC), is offset by tax and other government incentives.. That’s $150,000 per job for (I’m guessing) median very low $20’s per hour employment. Wasn’t the hundreds of millions in incentives to KIA supposed to attract automobile suppliers on its own account?
The “hundreds of millions” in incentives for Kia did attract suppliers, and they employ more Georgians than the plant itself if my memory serves. I put the hundreds of millions in mocking scare quotes because like most incentives, the majority of the dollars were abatements of future taxes. Had the plant not been built, there wouldn’t have been taxes paid. Again if memory serves, they were ten year abatements. The Kia deal happened in 2006. So now you have about 13,000 jobs and an entity that pays taxes. SK is making an investment on par with what Kia made, and will serve a lot more automakers than Kia. So…. hate if you want. The people employed won’t be, nor will the state nor Jackson county complain about the taxes this investment will eventually generate.
The abatement point is well-taken in considering the true value of the incentive. It’s also relevant that unlike the film giveaway heavily subsidizing general operations, it’s connected to large presumably more valuable fixed investment, not a tin building studio shell, and thus more likely to be around for awhile—but I’m not knowledgeable about the mobility of its equipment and operation..
Lots of $25 per hour jobs (and that may be a bit of an overstatement of the median pay at the battery plant) could be created with an $150,000 incentives, so awards are very much a who and where. There don’t seem to be any small local businesses knocking down a million in incentives for creating 7 new such jobs.
Kia has shipping and receive hubs at both the Brunswick and Savannah Harbors for import/export of Kia parts, cars, etc. The part warehouses along the I-16 and I-95 areas that abate the interstate serve not just Kia, but other auto manufactures in Tennessee and the Carolina’s.