State grapples with tax revenues and budget cuts

This week’s Courier Herald column:

While theatrics in Washington have consumed virtually all of the political headlines over the past week, a two-day budget hearing in Atlanta framed the state of Georgia’s economy and tax policy.  No immediate votes are scheduled, but the discussion provided a road map to future implications for the state’s politics and impacts on the pocketbooks of all Georgians.

The hearings featured a scattering of local economists, as well as experts with insights into Georgia’s workforce, tourism, and housing industries.  Notably absent were state agency heads who have been charged by Governor Brian Kemp with preparing budget cut recommendations for 4% for the remainder of this year, and 6% for next year.  Office of Planning and Budget Director Kelly Farr appeared on their behalf to note that the request is still in the early stages and testimony on specific plans is premature.

Setting aside the rift growing between the Governor’s office who controls the administration of appropriated funds and the legislature that appropriates those funds, Georgians need to understand the background of how we got to a point where cuts may be necessary.  A few words about what is and isn’t being proposed for cuts are also in order.

The big news out of the hearing was that tax revenues have been below estimates for the first two months of the year, which began July 1^st.  If those trends were to continue, cuts may be required.  Georgia hasn’t had to deal with similar issues for 7 or 8 years now. Our economy has been growing steadily since hitting bottom following the real estate crash, but also because the state revenue estimate was set below actual rates of growth – until last year.

At the end of the 2018 session of the General Assembly, Governor Deal raised the state’s revenue estimate based on strong growth.  To be clear, the state met those estimates, but the increase which allowed Georgia to fully fund QBE was set more aggressively as in the past, taking up much of the slack that had led to extra money for the state’s rainy day fund every year.

That same year, Georgia passed income tax cuts that are now being phased in.  That tax cut means $500 Million more in the pockets of Georgians this year, but that same amount isn’t going into the state’s coffers.  At the same time, Governor Kemp’s $3,000 pay raise to each teacher has increased state education spending by an additional $530 Million outside of the increase allotted for enrollment growth. 

The result of these budget changes is that Georgia’s economy must grow about 2.5% this year just to meet the revenue estimate, according to the State’s Economist Dr. Jeffrey Dorfman. If the economy slows, spending will have to be cut for the budget to balance.

Excluded from proposed cuts are most education line items, Medicaid, and transportation – the largest portions of Georgia’s budget.  The Governor’s office has indicated that it would prefer the cuts not also involve layoffs.  That leaves a narrow portion of state agencies such as the department of corrections, public safety, and various social services looking to squeeze fat and redundancies to hit the targeted number.

While the budget hearings took place with only 2.5 months of revenue data, the debate over cuts will continue until the legislature convenes in January.  By the time any proposals show up in a supplemental budget request, the state will have more than half a year of revenues banked, with better visibility on the issues that will make or break targets for the year. 

These projections will be important not only for the viability of potential budget cuts, but for additional tax cuts and new spending.  The legislation that cut income taxes this year has another quarter-percent cut that must be ratified by the legislature, as well as a remaining $2,000 promised pay raise to educators.    These promises now hinge on either a continued strong and growing economy, or new offsetting sources of revenue.