When Is A Surplus Not A Surplus?

This week’s Courier Herald column:

For the second year in a row, the state of Georgia’s fiscal coffers are overflowing.  Literally.

The state’s rainy day fund is at its legal limit.  Funds from tax revenues are still coming in above projection.  There is still some federal Covid relief money yet to be spent. 

It’s an unusual problem, in so much as having money in the bank can be considered a problem. Oddly, if you’re an elected official who must rely on public opinion to remain in office, managing a surplus can be as difficult as working through a deficit.

Normally at this point in a legislative session this space would be dedicated to explaining the major issues beginning to work their way through the legislature through the prism of the limited funds available and the constitutional requirement to balance a budget.  This year we need a preamble for that.  When an extra $6 Billion shows up when the state was only expecting roughly $30 Billion of revenue, some detail is required.

For this explanation we’ll look to a presentation made during the legislature’s “Budget Week”, which doesn’t quite have the same viewership as Shark Week on the Discovery Channel but affects more of our lives than great whites or hammerheads.  The state’s fiscal economist, Dr. Jeffrey Dorfman, is responsible for forecasting the state’s annual revenue projection, on which the budget is set.  As such, Dr. Dorfman spent quite a bit of time explaining why revenues were significantly higher than expected, and why legislators should approach this surplus with caution rather than glee. 

Last year, 22% of Georgia’s revenues came from capital gains taxes.  That’s beyond an aberration, at more than one out of every five dollars of taxes collected.  While most of us were expecting the economy to begin slowing down last year with the end of Covid stimulus programs including extended unemployment benefits, the Federal Reserve’s decision to keep interest rates at zero well after the economy had rebounded from Covid helped to inflate prices of stocks and real estate. 

When those assets were sold at profits, the government gets a cut of those profits as capital gains.  Corporations and individuals pay these taxes.

Now let’s look at how housing prices and the stock market has fared in 2022.  While the rest of the economy has been humming along in Georgia generating income and sales taxes without any anticipated slow down, most indexes that represent stock and bond investments show declines for 2022, meaning there will be few capital gains on investments to tax. 

Real estate prices have peaked and in some areas declined slightly, with transaction volumes also declining.  Fewer transactions with relatively stable prices means fewer one-time capital gains here as well.

While the state will surely capture some capital gains taxes this year, the amount shouldn’t be anywhere near the level paid when Georgians filed their taxes for 2021’s profits and paid taxes on the windfall.  More troublesome, because of quirks in tax code changes at the Federal and State level, it’s possible that some taxes paid to the state over the past 12 months are actual overpayments, and the state will owe a reasonable portion of this surplus back to taxpayers as refunds.

Because of the one-time nature of this surge in revenue, the Governor’s budget team and the legislature are both reluctant to embark on new spending for recurring programs which would assume this money will come in this year and again the next.  Instead, a large portion of it will be rebated back to taxpayers.  The Governor’s budget plan before lawmakers includes rebates to Georgians who filed income taxes, as well as one time grants to those who pay property taxes in order to offset expected property tax increases that come with rising home values.

It was roughly a decade ago that Georgia’s rainy day fund was empty and we were furloughing state employees and teachers to make the expenses match the revenue.  While our economy has transformed and grown steadily since, the lessons of these hard times are not lost on those writing the budgets of today.

Surpluses are better than deficits.  The proper disposition of a surplus goes a long way to prevent the deficits of tomorrow.