Wednesday, December 10, 2008

State Fiscal Crisis: Georgia Has a Revenue Problem

The Georgia Budget and Policy Institute (GBPI) released a report today highlighting the fact that state spending is not a driving factor in the projected $2.5 billion budget deficit facing the state in the current fiscal year and possible $1 billion deficit in FY 2010. The report, State Fiscal Crisis: Georgia Has a Revenue Problem, found that the current budget shortfall is due to the combination of a historically weak economy and a declining tax base.

Even before the current economic recession, state revenue collections as a percentage of personal income have declined dramatically. In other words, as Georgians' incomes increased, the state taxes collected from Georgians did not keep pace. The weakening of the tax base has occurred over the past 10 years as Georgia has cut taxes across the board. In addition, the movement from a manufacturing to a service economy and the rise of Internet sales have further weakened the sales tax base. These tax policy decisions and a changing economy have cost the state a minimum of $1.5 billion each year.

Even during the economic recovery between FY 2003 and FY 2008 this inadequate revenue base resulted in $2.4 billion in funding formula austerity cuts and sustained budget reductions for the Board of Education and Board of Regents. In addition, due to funding limitations in Medicaid and PeachCare, the number of uninsured children in Georgia increased, and Georgia was unable to make adequate investments in such areas as a state trauma network, a community mental health system, or services for those with mental and physical disabilities. In fact, Georgia ranks 49th in state spending per capita.

"The inadequate revenue base has resulted in lagging funding for the physical and human infrastructure of the state even during times of economic growth," noted GBPI Executive Director Alan Essig. "In the midst of the current economic recession, revenues are not sufficient to pay for our basic public services, causing deep cuts that will likely worsen in the coming year."

Although revenue collections for the first five months of the fiscal year have shown only a 1.3 percent decline, due to the further weakening of the economy expected throughout calendar year 2009, the Georgia State University Economic Forecasting Center projects a 6 percent revenue decline in the current fiscal year and a 1 percent revenue decline in FY 2010. With Georgia potentially facing a $2.5 billion budget shortfall in the current fiscal year and an additional $1 billion shortfall next fiscal year, new revenues should be part of a balanced deficit reduction package to address this fiscal crisis.

Revenue raising options include:

* Increase cigarette taxes by $1 a pack to raise $450 million.
* Impose a temporary 1 percent surcharge on family income over $400,000 to raise an estimated $225 million. (Would impact less than 1 percent of taxpayers.)
* Reinstate the state estate tax to raise between $100 million and $150 million. (Would impact less than 1 percent of all estates.)
* Lower the cap on various tax credits and exemptions passed during the past two legislative sessions. For example, lower the $50 million cap on the tax credit for student scholarship organization donations to $2 million during the recession.
* Implement an income ceiling on the child care tax credit to save $20 million.
* Create a ceiling on vendor compensation for sales tax collection.

In the long term, Georgia needs to undertake fundamental tax reform and modernization that addresses the question: How do we fairly and equitably raise the funds necessary to provide the quality public services and infrastructure that Georgians demand? Such tax reform and modernization should include:

* Create a tax break budget to increase transparency and accountability for tax breaks. Like 39 other states, Georgia needs a tax break budget to detail the costs and benefits of tax breaks. A tax break budget would provide data that legislators and the public need to weigh Georgia's spending options.
* Eliminate unnecessary and ineffective tax breaks based on data gathered from a tax break budget.
* Expand the sales tax to cover some household services. The change from a manufacturing to a service economy and the rise of Internet sales have weakened the sales tax base. Broadening the sales tax to cover some services would help strengthen this declining revenue base.
* Modernize the income tax structure to the 21st century. The income tax has been relatively unchanged since the 1930's. The income tax should be modernized through increasing the standard deductions, broadening the tax brackets, establishing a new top income tax rate, and implementing a state Earned Income Tax Credit.

"Revenue increases as part of a balanced deficit reduction package would be more beneficial to the economy than budget cuts alone. In the long term, fundamental tax reform and modernization would allow Georgia to make the investments in the human and physical infrastructure of the state that is necessary for Georgia to prosper," said Essig.

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