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Deal Eliminates Jobs, Cuts Budgets, Offers Harsh Words for Obamacare

Mike Klein

During his inaugural address this past Monday Georgia Governor Nathan Deal pledged, “We must justify every cent that government extracts from our society.”  On Wednesday afternoon the governor was back before the General Assembly with a few more eye-popping details.

Deal used his first State of the State address to announce 14,000 mostly vacant state government positions will be eliminated and state employment will be frozen at current levels.  In addition, the governor’s first budget reveals that many programs will be curtailed and some will be entirely gone.

“Many politicians have long talked about reducing the size of government,” Deal said. “My friends, we are doing it.” The governor told agencies to reduce current spending by 4% and to expect 7% average budget cuts in the fiscal year that starts July 1.

Governor Deal proposed no new taxes or increases to existing taxes.  The former nine-term congressman did not mention proposals made last week by the Special Council on Tax Reform and Fairness.

The 4% current year budget reduction should be easy to achieve because the state has withheld funds from monthly payments made to agencies since last summer. Deal said 7% reductions next year would not be “uniform across agencies, but are designed to give priority funding to core responsibilities.” Some will be reduced more, such as 12.3% at Georgia Public Broadcasting, and some will receive budget increases.

Georgia Governor Nathan Deal

Deal presented the General Assembly with an $18.162 billion fiscal 2012 budget proposal that is 3.75% and $273 million more than fiscal 2011. The governor said teacher furloughs should end and HOPE scholarship grants cannot exceed funding available from the Georgia lottery. “We must act now to maintain the Georgia jewel known as HOPE,” Deal said.

Education would be 54% of state expenditures. “My budget will end teacher furloughs and keep students in school for a full year,” Deal said. “I view education as our number one economic development tool and there is no more forward – looking or strategic place to invest.”

The state Department of Education would be almost unchanged at $6.994 billion but other state education spending would decline $498 million. The largest cuts are $275 million at the Student Finance Commission because of anticipated lower lottery fund payments and $118 million at the Board of Regents which would have a $1.723 billion budget.

Reduced lottery dollars would trim Bright from the Start by $19.7 million. The Technical College System would be reduced by $18.9 million to $300 million. TCS has been under pressure during the recession because enrollments are going up and dollars are going down.

Health care spending would increase $747 million to $4 billion, a number that will continue to grow due to federal mandates that will eventually add 650,000 Georgians to the Medicaid program. “This mandated expansion of service will cost Georgia Medicaid an additional $2.5 billion in state funds alone over the next ten years,” Deal said. Health care costs are 22.5% of state expenditures.

The governor’s harshest words were directed toward Washington. “The (President Barack) Obama administration has placed onerous maintenance of effort requirements as well, which have severely tied our hands with respect to managing our state Medicaid program,” Deal said. He predicted that without more flexibility, “we expect to see patient access to care severely limited.”

The Department of Community Health would receive $642 million more to $2.715 billion, Behavior Health and Developmental Disabilities would receive $111 million more to $876 million, and Human Services would remain nearly unchanged at $469.8 million.

Corrections reform was a major theme of Deal’s inaugural address and that emphasis carried forward into his proposed budget. The state Department of Corrections would receive $64.6 million more to $1.036 billion. Juvenile justice would receive $13.2 million more to $279 million and Public Safety would receive $6.2 million more to $107 million.

Additional corrections dollars would fund many ideas. Deal favors expansion of day reporting centers along with the creation of new drug, DUI and mental health courts, along with new probation and treatment options. Some public safety programs would absorb cuts, but overall total public safety spending would increase $82.8 million to $1.542 billion.

State of Georgia Seal

The Department of Economic Development budget would increase 43%. It would receive $12.5 million more to $41 million. Deal would fund part of that increase with $9.288 million in tobacco settlement funds; the department received no tobacco settlement funds last year.

Statewide courts would be spared budget reductions. The Supreme Court budget would increase slightly to $8.055 million. There would be no reductions to the Superior Courts, the Court of Appeals and the Juvenile Courts. Prosecuting attorneys would receive $1.8 million more to $57.5 million.

A lengthy list of possible losers includes nothing for the sports, music and aviation halls of fame which have been budget drains for years. There would be no state funds for the Civil War Commission, the State Medical Education Board, the Council for the Arts and the State Properties Commission.

The biggest piece of a proposed bond package is $231 million for K-12 construction, equipment and school buses. Another $15 million would fund STEM charter schools that specialize in science, technology, engineering and mathematics. Deal proposed bond packages to fund reservoirs, deepen the Savannah harbor, make repairs to universities and upgrade technical colleges.

“My proposed bond package is less than $563 million which is approximately 50% less than bond packages in recent years,” Deal said. “I urge you to join me in keeping our borrowing at a lower level than the past. I believe that is the wise course of action.”

Mike Klein is Editor at the Georgia Public Policy Foundation.

January 12, 2011 Posted by | Uncategorized | , , , , , , | Leave a comment

Illinois Tries Higher Income Taxes to Reduce Budget Bloodbath

Mike Klein

Want to fix your state budget problems?  Georgia and Illinois have different ideas about that.  Last week the Georgia Special Council on Tax Reform and Fairness proposed lower personal and corporate income tax rates.  Last night the Illinois Senate and House passed massive tax increases.

Working past midnight, Illinois’ Democratic majority legislators passed bills that will increase personal income taxes from 3% to 5% and corporate taxes increase from 4.9% to 7%.  No Republicans voted in favor of the taxes.  Increases would take effect immediately after the legislation is signed by the Pat Quinn, the state’s Democratic governor.

Here’s what Illinois gets by increasing the tax rates:  It expects to cover $6 billion of the state’s annual budget deficit which is approaching $15 billion this year.  That leaves a nifty $9 billion uncovered.  The tax hikes will sunset after four years unless they are extended by the state legislature.

By contrast, the Georgia proposal would reduce personal and corporate income tax rates from a current 6% to 5% in the 2012 calendar year, 4.5% in 2013 and 4% starting January 1, 2014.  The Georgia proposal would change the sales tax structure, in particular, state sales tax on groceries could be reimposed as early as July 1, 2011.

Read more about what Illinois legislatures did overnight on Illinois Statehouse News Online: http://illinois.statehousenewsonline.com/4897/legislature-passes-tax-hike/

And be glad you do not live in Illinois!

Mike Klein is Editor at the Georgia Public Foundation.

January 12, 2011 Posted by | Uncategorized | , , , , | Leave a comment

Tax Council Proposes Lower Income Tax Rates And New Groceries Tax

Mike Klein

The Georgia Special Council on Tax Reform and Fairness final report released today proposed dramatic taxation policy changes that include proposals to reduce personal and corporate income taxes and change the way groceries, cigarettes and motor fuel taxes are imposed. The definite direction is toward what are known as consumption taxes and away from state taxation on income.

New sales taxes could be imposed on some professional services and energy taxes that affect industries could receive new exemptions. Taxation changes are possible for the communications services and insurance industries.  The Council also recommended that the General Assembly should abandon back-to-school sales tax holidays that cost the state $36-to-$47 million annually.

The twelve-member Special Council of economists and private industry executives has worked on these recommendations since last summer.  Proposals are intended to reinvigorate and stimulate the Georgia business environment. They also could stabilize state government revenue that was battered during the recent recession because state income is highly dependent on income taxes.

The Tax Reform Council’s major recommendations include:

Personal Income Tax: Maintain the 6% current rate during 2011. Reduce the rate to 5% in January 2012, 4.5% in January 2013 and 4% in January 2014.  Georgia itemized deductions, standard deductions and limited exemptions would be eliminated.  The personal exemption for dependents would be retained at $2,000.  The Council would eliminate adjustments to federal adjusted gross income so that Georgia AGI conforms with federal AGI with limited exemptions.

The Council proposed repeal of retirement income exclusions that are set to begin in 2012, and it proposed phase-out of the current exclusion limit of $35,000 over a period of time.  Current personal income tax credits would sunset in 2014 including the current low income credit.  Credits would remain in place for income taxes paid to other states, federally funded credits for energy and water-efficient products and some angel investor credits.

Corporate Income Tax: Simplify credits and maintain parity with the personal income tax rate: This means corporate income tax rates would decline on the same schedule as personal rates, staying at 6% this calendar year and then reducing to 4% by January 2014.  All current economic development tax credits would be eliminated in 2012.  All other existing corporate tax credits would sunset in 2014 except those that were granted prior to the sunset date.

The Council also proposed to create a new economic development recruitment fund adminstered by the Department of Economic Development which would have wide latitude to craft rules and regulations.  The Department could choose to grant economic development tax credits based on jobs created and the total value of capital investment.

Groceries Sales Tax: Eliminate the current food for home consumption state sales tax exemption effective June 30, 2011 with an exception for food purchased with food stamps and food purchased as part of the WIC program (Women, Infants and Children).   This means the state would begin to impose sales taxes on grocery purchases at the same rate it taxes other purchases.

Government Exemptions and Business Inputs: The Council proposed that sales and use tax exemptions that constitute government exemptions and business inputs should remain in law and should not sunset.  Many of these impact the agriculture, mining and manufacturing industries.  The Council also recommended that a new business input exemption should be created for energy used in those same three industries. Taxes on energy are considered to negatively affect the competitiveness of businesses and entire industries when Georgia imposes them and other states do not.

The Council recommended all other non-government and non-business input tax exemptions should sunset pending review by the General Assembly to determine whether economic conditions or other reasons justify continuing them.  Georgia Tax Code has more than 100 special exemptions including some that affect the health care and education industries.

Casual Sales Tax: Impose state sales tax on motor vehicles, watercraft and aircraft.  Casual sales is defined as one party to another party outside of business relationships entered into by persons who  purchase vehicles, watercraft and aircraft from dealers.  Forty-four states already impose this tax.

Personal and Household Services: The recommendation is to impose state sales tax.  Georgia would not tax babysitting but examples in the Council report include downloading books and music from the Internet.  Also, services tied to tangible personal property such as repair services including home repair, personal services such as haircuts and other services provided by vendors who already have a state sales tax certificate.

Cigarette Tax: Increase from 37 cents to 68 cents per package.   The higher rate would be on par with the average in other southeastern states.  Georgia’s cigarette sales tax is the lowest in the Southeast. The highest per package tax is $1.34 in Florida.  Tennessee charges 62 cents, South Carolina 57 cents, North Carolina 45 cents and Alabama 43 cents per package.

Communications Services: The Council recommends replacement of current sales and use taxes and franchise fees  with a 7% excise tax on “communications services.”  The tax would not apply to Internet access because federal law prohibits states from imposing tax on internet access services.

Motor Fuel Tax: Georgia highway and bridge construction and maintenance is financed by motor fuel taxes.  There are two taxes: a 7.5 cents per gallon tax that has been in place since 1971 and a 3% variable tax that changes every six months based on current retail pricing.  The Council recommended converting the variable tax rate that changes twice per year to a per gallon rate reviewed annually.  There is no proposal to increase the actual tax.

Insurance Premium Taxes: This tax is received on policies written in Georgia.  It actually is two taxes with revenue paid to the state and also to local governments.  The Council said the current cost to insurers in Georgia is more than double the U.S. insurance premium rate average tax cost.  The Council is recommending that the tax rate should be 1.75% and that the General Assembly should determine how that should be divided between state and local governments.  The state revenue structure should be reviewed on four-to-eight year cycles in line with the gubernatorial calendar.

E-Commerce Taxation: The Council reported Georgia will lose up to $410 million in 2012  because a U.S. Supreme Court ruling does not allow states to require that vendors must collect sales taxes on purchases made in those states.  Several states including Georgia have joined an effort to resolve this question.  The Council recommended that Georgia enact measures to encourage vendors to collect sales and use taxes on a voluntary basis. Several states have attempted to resolve this question with legislation that often ends up in litigation.

Other Recommendations:
There are many. The state should establish a Tax Court independent of the state Department of Revenue to hear tax appeals.  A commission should be established to study local property taxation policy.  Local governments and school boards should have the option to use SPLOST revenue that is not required for capital projects to meet operating expense needs, if approved by voters.

There should be a review of the state Department of Revenue organization, practices and processes. This should include better alignment between local governments and the Department of Revenue along with identification of uncollected sales tax revenues.

The state revenue structure should be reviewed on four-to-eight year cycles in line with the gubernatorial calendar.  (The current review is the first in 80 years!).  The state should rebuild its reserves — known as The Rainy Day Fund — in order to ensure that it can retain a triple A bond rating. Reserves that once exceeded $1.5 billion slipped below $100 million as the state used those funds to pay its bills during the recession.

Next:  The Special Council on Tax Reform report will be reviewed by a Special Joint Committee on Revenue Structure whose members will include the Senate President and House Speaker, Senate and House majority and minority leaders, and the Senate Finance and House Ways and Means chairpersons. Two additional senators and two representatives will also serve on the committee.

The Special Joint Committee review could take two or three months. Final House and Senate votes, if they occur this year, would not be expected until near the end of the General Assembly session that begins Monday. The bill that advances from the Special Joint Committee would be voted up-or-down by House and Senate members and it could not be amended on the floor.

The Council’s complete report and background materials are available on its website:

http://fiscalresearch.gsu.edu/taxcouncil/downloads/FINAL_REPORT_Jan_7_2011.pdf

Mike Klein is Editor at the Georgia Public Policy Foundation.

January 7, 2011 Posted by | Uncategorized | , , | Leave a comment

Georgia Tax Reform Council Final Report on Hold Until Next Monday

Mike Klein

The Georgia Special Council on Tax Reform and Fairness convened what was expected to be its final public meeting Wednesday afternoon in Atlanta.  Council chair A.D. Frazier trimmed expectations at the outset when he said recommendations will not be ready until next Monday afternoon. So this process that began five months ago will last at least five more days.

Frazier said the Council expects to propose creation of a new Tax Court to streamline citizen complaint hearings.  It will suggest legislators wait until next year before they vote on what Frazier said could be 50 pages of recommendations.  The Council is expected to suggest this analysis should be undertaken every four years. The last analysis was several decades ago.

“I didn’t want you to go away completely empty-handed,” Frazier told about 100 reporters, lobbyists and government affairs experts during his Atlanta presentation.  Council proposals will be reviewed with Governor-elect Nathan Deal, Lieutenant Governor Casey Cagle and House Speaker David Ralston before public release. None were in the room Wednesday afternoon.

A. D. Frazier

“We’ve tried to come as close to being revenue neutral as we could,” Frazier said. “It’s important for us to not lose the triple A bond rating.” The chairman said the state’s corporate tax rate, currently 6%, is not “nearly the driver in business decisions to locate here as we thought.” He said personal income tax rates, also currently 6%, are at least twice as important or more.

The 2010 General Assembly created the Special Council on Tax Reform to propose ideas to stimulate economic growth.  As a byproduct these ideas would also stabilize state government revenue and make it more predictable during economic downturns. The Council faces a deadline not later than next Monday to submit the final report. None of its proposals are binding on the General Assembly.

The final document is expected to discuss corporate and personal income taxes, motor fuel, cigarette and groceries sales taxes, corporate sales tax exemptions, new taxes on professional services and changes to communications industry taxes. Frazier said Georgia ranks 49th nationally in state taxes per capita, meaning just one state imposes less tax on its citizens.

Frazier reiterated tax policy should enable Georgia to remain competitive with its neighbors in a tax policy environment that will ensure predictability for industry and local governments. Frazier said the Council will not have any recommendations about local property tax reform.

Georgia’s economy has shown some signs of a rebound, but it is a long way from being healthy.  State revenue plunged and state agency expenses were markedly reduced during the economic downturn largely because revenue from personal income tax receipts went into a free fall.

Recent monthly revenue numbers are improved. Every month since June has shown a year-to-year gain. But the next state budget still faces a shortfall that could be up to $2 billion. Georgia has reduced expenses by some 20% since the economic downturn began in December 2007. “We’re lucky,” Frazier said, noting some states face deficits reaching tens of billions of dollars.

Mike Klein is Editor at the Georgia Public Policy Foundation.

January 5, 2011 Posted by | Uncategorized | , , , | Leave a comment

Georgia Revenue Up But Still Lags Behind 2008 and 2007

Mike Klein

Georgia announced November monthly net revenue collections that again provide indication the state might be slowly working its way out of the three-year recession. Georgia posted a sixth consecutive year-to-year monthly gain. The fiscal year is up 7.4 percent.

November collections totaled $1.268 billion, up $79.646 million from $1.188 billion in November one year ago. Net revenue is up almost $435 million after five months in the year-to-year comparison.  But a longer view suggests there is still a long road ahead before the state enjoys genuine fiscal good health.

November collections this year are far below $1.419 billion in November 2008 and $1.399 billion in November three years ago. Economists often point to December 2007 as the beginning of the recession, and some contend the recession ended in summer 2009. Others argue the recession will not end until unemployment returns to traditional levels, which might take several years.

Georgia legislators return to Atlanta in January. Challenges for the Republican – dominated General Assembly include economizing government, writing a Fiscal 2012 balanced budget and approving a tax code to change how the state earns revenue to support $18 billion in annual spending.

The Fiscal 2012 budget that must be in place before July 1 is generally considered to be about $1.7 billion short,  One reason is Georgia will lose $1.2 billion in federal stimulus funds.  This year those dollars paid for education, roads and lots of other projects, big and small.

An appointed council of economists and private industry executives that began working last summer will make new tax code recommendations to the General Assembly before Republican Governor-elect Nathan Deal’s inauguration office on Monday, January 10.

Sources familiar with the Georgia Special Council on Tax Reform and Fairness expect proposed reductions to current personal income tax and sales tax rates. There could also be proposed changes to the corporate income rate and a long list of tax exemptions might be eliminated

Mike Klein is Editor at the Georgia Public Policy Foundation.

December 14, 2010 Posted by | Uncategorized | , , , | Leave a comment

WSJ Economics Writer: U.S. Cannot Borrow Its Way to Prosperity

Stephen Moore remembers asking his son, who’s the best basketball player in the world?  They agreed, it’s LeBron James, who earns about $40 million per year in salaries and endorsements.  Moore posed a question to his son: how long would it take LeBron James to earn $1 trillion?  The answer is a staggering 25,000 seasons.  Not even Michael Jordan played that long!

Moore delivered the economic keynote address at this past weekend’s conference hosted by the Georgia Public Policy Foundation and the Conservative Leadership Policy Institute.  Moore is the Wall Street Journal’s senior economics writer, a member of its editorial board, the author of six books and a former senior economist on the Congressional Joint Economic Committee.

Here’s the point Moore made with his LeBron James example:  We hardly know what $1 trillion means even as we watch the federal government routinely run debt into the several trillions.

“We have spent too much money, we have borrowed too much money, we have printed too much money and we have taken too much power from the states,” Moore said.  “Milton Friedman taught us this 30 or 40 years ago.  There’s no free lunch.  If Washington or the state of Georgia spends a dollar, that dollar has to come from somewhere.”

Last week the National Commission on Fiscal Responsibility and Reform floated a draft report with ideas to reduce the national debt by $4 trillion over 10 years.  Dozens of proposals would significantly change Social Security, other federal entitlements and discretionary spending.

Moore’s remarks in Atlanta on Saturday are timely because of that report, and also because Congress went back to work Monday, ready to argue about what to do with your money.

Tuesday’s agenda will include the Senate debate on funding earmarks.  Thursday’s action will move to the White House where President Barack Obama, Democratic and Republican leaders seem ready to dig in their heels about extension of Bush-era federal income tax cuts.  Congress also needs to fix the alternative minimum tax for 2010 taxpayers before the holiday break.

Stephen Moore

“We had better make sure we extend all the Bush tax rates come next January,” Moore told 250 conference attendees.  “If you want to balance the budget in Washington, if you want to balance the budget here in Atlanta, you want more rich people.”

Here’s why:  Rich people invest; investment triggers growth; growth triggers more employment; employed people purchases products and services and employed people pay taxes, exactly the opposite of unemployed people who require government services paid for by employed people.

Moore believes the nation has arrived at a critical historical point:   “The number one issue is this, what country is going to be the global number one super power?  For our lives, the United States has been a force for good.  We’ve led the world.

“But now for the first time in our lives we have an honest to god rival.  And who is that; China, now becoming one of the most prosperous countries in the world.  China predicts in 18-to-20 years that it will catch the United States,” Moore said.

“China is focused right now like a laser beam on competitors.  They have their eye on the ball.  That’s what we need to do as a nation and that’s what we need to do in Georgia.  Everything you do, make sure you keep in mind, is this going to make Georgia more competitive?

“Step one and I’m deadly serious about this: Abolish the state income tax.  This is not a radical idea. There are nine states in this country that have no state income tax,” Moore said.  “Texas, Florida, Tennessee; these states are able to pay their bills without having an income tax.  It’s so obvious; the states without an income tax are the ones that have driven growth.”

Georgia’s Special Council on Tax Reform is expected to propose some revisions to the state’s 6% individual income tax when it reports to the General Assembly in January.  Sources say it might propose reduced individual income tax rates in a new model that would move taxation away from earned income and toward taxation of services and products purchased.

Moore predicted the Republican majority U.S. House will pass a bill to repeal Obamacare, the Senate will not and health care will become “death by a thousand cuts.”  He predicted the individual mandate will be eliminated.  “What we need to do with health care is, we need to allow states to begin to experiment.  Let people buy insurance from anywhere they want to.”

Moore started his address with this idea: “The election we just saw was not a victory for the Republican Party.  It was a victory for the conservative movement and free market principles.”  He finished with this idea:  “Both parties are still fighting with each other.  It’s like none of them learned the lesson.”

Mike Klein is Editor at the Georgia Public Policy Foundation.

November 15, 2010 Posted by | Uncategorized | , , , , , , , | Leave a comment