Mike Klein Online

Georgia Must Create Recession Resistant Tax Reform

Georgia is respected for fiscally conservative state budgets. But now money is tighter than since anyone can remember and there’s not much in the savings account.   At least we’re not like California where the state government budget resembles economic swamp water.

Tommy Hills is Georgia state government’s chief financial officer.  “I’ve told people I work with that this is not something that just next year is going to turn around,” Hills said recently at The Commerce Club in downtown Atlanta.  “It’s going to be a culture for two or three years of having to continue to cut budgets of all the state departments each year, including the education community.”

When times were flush, state budgets grew annually.  But state revenue has declined year-to-year in five of the past ten years.  Annual revenue is down 20% over three years. Year-to-date was down 10.3% through May for FY 2010 compared to FY 2009.  May 2010 revenue declined more than $75 million compared to May 2009.

When times were flush, some politicians and critics asked why Georgia needed a $1.7 billion emergency spending account, the so-called rainy day fund.  Then recession hit and the fund was spent down to its current level of about $100 million.  It vanished like water on the beach.  It will take years to restore the rainy day fund to an acceptable level,.

When times were flush, Georgia did not need billions of dollars from Washington to balance its budget.  The federal Recovery.gov website says Georgia will receive $5.4 billion in total stimulus assistance. Two billion dollars have been received and spent; another $2 billion is projected in Fiscal 2011 and then it shrinks to about $1.2 billion in Fiscal 2012.

Hills: “We Drained Every Reserve That We Had”

Tommy Hills again: “I don’t think that we’ll be able to restore funding to the level that it was in 2008 until two or three years from now, and that assumes that you’ve got good economic growth rates.  That’s the depth we went to and we drained every reserve that we had.”

This past week Governor Sonny Perdue signed legislation to start the most comprehensive tax reform process since Zell Miller eliminated the state sales tax on groceries 14 years ago.

Perdue, four named economists and several business community members will draft new tax recommendations that will be sent to a Senate – House Special Committee next year. Once written as legislation, the General Assembly will vote up or down, without any amendments.  This will be Perdue’s final big stage performance and perhaps also his eventual legacy.

Georgia must create a more recession resistant tax base.  Recession proof would be ideal but that asks for the impossible.  A reasonable definition for recession resistant would be an income structure that resists wild, multi-billion dollar swings when the economy falters, as it will again.  And it should be accompanied by an equally serious effort to redefine essential state government services and eliminate whatever does not meet the new definition.

A recession resistant state revenue structure must be politically acceptable, cognizant of the impact on local community budgets, fair with regard to lower income persons, in line with the revenue models in surrounding states, transparent so all taxpayers can easily identify their tax burden and … this is really important … acceptable to whoever is the next governor.

Recession Became Tax Reform Tipping Point

The recession that cost Georgia billions of tax revenue dollars became the final tipping point for tax reform that has been discussed for years but until now, never comprehensively enacted.

Reform options might include a state sales tax large enough to eliminate other taxes, modifying business and individual income tax rates, changes to alcohol, tobacco and gasoline taxes, what to do about sales tax holidays, modernized telecom taxes, new taxes on services, capital gains rate changes, whether to tax energy used in manufacturing, rethinking inventory taxes, imposing new user fees and reviewing tax exemptions and credits that might have become antiquated.

Tax reform sometimes sends conflicting messages.  Last month the governor signed legislation to gradually phase out state income taxes imposed on senior citizens and the state’s portion of homeowner property taxes.  But now some Atlanta metro counties might cancel the property tax exemption that seniors age 62 and older receive because it reduces local education funding.

State Groceries Sales Tax Could Raise $500 Million

There is strong momentum is to eliminate the grocery sales tax exemption enacted by Miller.  “A lot of people feel like that’s not something we have to do anymore,” state CFO Tommy Hills said at The Commerce Club.   Economists predict Georgia could raise $500 million annually by removing the exemption.  Counties already may impose a groceries sales tax.

A state groceries tax would provide predictable revenue and it would collect revenue from people who do not pay tax dollars equal to what they receive in government services.  This includes people who do not own property along with transient workers and people who are here illegally.

Tax reform discussions will take place this summer and fall against the backdrop of a state budget that will remain under pressure for years, with many eyes on November elections, a new governor next January and the pressure and posturing that will accompany redistricting after the 2010 census.

Georgia needs to get tax reform right because more than any other single issue, our future is riding on it.

Georgia Fiscal 2011 Federal Stimulus Dollars:

Education                                                      $821,517,470

Medicaid Funding                                          $748,909,573

Human Services                                           $231,323,583

Corrections                                                    $84,877,989

Juvenile Justice                                                $28,020,203

Board of Regents, USG                                  $23,186,142

Public Safety                                                    $8,872,757

Bureau of Investigation                                       $6,132,772

Total                                                           $1,952,840,48

Source:  Stimulus Accountability Office, State of Georgia

Mike Klein is Editor at the Georgia Public Policy Foundation.

June 6, 2010 - Posted by mikekleinonline | Uncategorized | Georgia, Governor Sonny Perdue, Mike Klein Online, The Commerce Club, Tommy Hills