When the Georgia General Assembly returns to work a week from Monday it may find itself haunted by the Ghost of Decisions Past.
Two years ago, the state was expecting a financial windfall because of a massive tax bill Congress approved that experts predicted would increase state tax collections by hundreds of millions of dollars.
Back then, Gov. Nathan Deal told lawmakers they should wait to see whether the new money actually rolled in before moving to reduce the possible windfall.
But such caution fell on deaf ears in early 2018, an election year in which lawmakers were jockeying to replace the term-limited governor and move into other top posts. The Legislature instead spent the predicted windfall on a two-part cut in the top state income tax rate, a decision that may have helped bring about the worst fiscal crisis the state has seen since the Great Recession.
Lawmakers say it's unclear whether Georgia ever got the predicted windfall — tied to reduced deductions as part of the federal tax overhaul that was expected to deter Georgians from itemizing expenses at tax time. And the state saw little if any revenue growth during many months of 2019. That, in turn, led the man who replaced Deal, Brian Kemp, to call for 4% spending reductions this year and 6% next year, despite a generally strong state economy.
General Assembly sessions are always about money — how to spend the $27.5 billion in the state budget, which businesses or individuals should receive tax breaks or be taxed. But in the 2020 General Assembly session, money will take center stage in a way not seen since the near-collapse of the country’s economy a decade ago.
Lawmakers will spend much of the session deciding how to cut the budget to square with the revenue coming in, since the state — unlike the federal government — can’t legally run a deficit.
And they will decide whether to continue what they started in 2018 and vote to lower the top state income tax rate again, from 5.75% to 5.5%, saving taxpayers money but cutting state revenue by hundreds of millions of dollars more.
Cutting the rate again could mean even deeper spending reductions next fiscal year, which begins July 1. But as when lawmakers cut the rate initially in 2018, the decision will be made in an election year, when electoral politics will play a role in many if not most decisions.
“I think that (tax cut) is still a priority for a lot of Republicans, including the Legislature,” said Kyle Wingfield, the president of the conservative Georgia Public Policy Foundation. “I would expect to see them make good on that promise they made in 2018.”
But Rep. David Wilkerson, D-Powder Springs, an accountant who serves on the House Budget and Fiscal Affairs Oversight Committee, said lawmakers should drop the idea, calling the original tax rate cut a "self-inflicted wound" to state finances.
“This is Georgia,” he said. “We are not going to play chicken with the budget.”
Budget, tax breaks = priorities
Through the state’s budget, taxpayers help educate 2 million children, provide health care to more than 2 million Georgians, build roads and bridges, manage parks, investigate crimes and incarcerate criminals, and regulate insurance firms and utilities, along with dozens of professions. The state issues driver’s licenses and helps fund nursing home care for the elderly.
The budget is a statement of the state’s priorities — Kemp, for instance, exempted k-12 schools, most college programs, the public health care program Medicaid and the agency that builds and maintains roads and bridges from his spending cuts edict.
At the same time, Kemp has promised teachers a $5,000 pay raise and wants to expand access to health care and insurance.
After providing a hefty down payment on the pay raise promise last year, it's unclear how much Kemp will be able to give teachers this session.
The governor has proposed major health care programs that are currently under review by the federal government. They, too, would cost big money.
Meanwhile, the first decision for lawmakers may be considering whether to approve the roughly $200 million in spending cuts for this fiscal year that have at least partially been implemented.
About one-third of the money is being saved by eliminating 1,200 vacant state positions. That means not filling, for instance, some vacancies in the state's child welfare and juvenile prison agencies, and openings for food safety inspectors.
Kemp announced the cutback plan in August after several sluggish months of tax collections. A month later, the state’s fiscal economist told lawmakers that there was a 50-50 chance of a mild recession in 2020, although some of the talk of a slowdown has stalled as the economy remains strong.
Since August, the tax collection picture has not improved. As of the end of November the state wasn't raising enough to fund the spending plan lawmakers approved last year. That budget was based on rising tax collections. That's not happening.
State Senate Appropriations Chairman Jack Hill, R-Reidsville, who tracks such things closely, said the rate of revenue growth in Georgia lags behind what surrounding states are seeing.
“State revenues have been volatile basically since the federal tax cut was passed and withholding tables were lowered,” Hill wrote recently in his weekly newsletter. “State leaders were told that a huge windfall was coming the states’ way due to the federal tax cut. It has been impossible to identify any bump the state has received from the federal tax cut.”
Hill's counterpart in the state House, the equally data-geekish Terry England, R-Auburn, also said 2018's Hurricane Michael has played a role in depressing farm income, as have the trade wars. He said farmers and the communities where they live and do business lost billions of dollars in the storm.
While many of the spending cuts have already been implemented, they will require the blessing of lawmakers, who will then have to figure out how to trim 6% next year.
“We are going to have to cut some things we don’t want to cut, potentially,” England said. “This is not going to be anything like what we did after the recession, but it’s not going to be easy.”
Then, lawmakers cut deeply into school spending, furloughed and laid off state employees and teachers, and shuttered programs. Both college tuition and property taxes in many communities rose to make up for what the state wasn’t spending.
Former Republican lawmaker Edward Lindsey, now a top Statehouse lobbyist with Dentons, said in some ways budgeting is easier when there isn’t any money to spend. Legislators are inundated with requests for new spending, and saying “no” can become the default answer.
“There won’t be a lot of wiggle room in the budget,” Lindsey said.
But England said it will be especially difficult because some agencies — such as the Department of Natural Resources — have either just recently returned to spending levels before the Great Recession or are still behind where they were in 2007, once population growth and inflation are factored in.
“The thing is, we have been very careful about any expansion of state government in general,” the House Appropriations chairman said. “We haven’t hired back all the employees that we let go. It’s not like we have gone back and said, ‘OK, we are going back to where we were in 2007.”
More than half of the extra money has been poured into schools in the past decade, he said.
“That is what is going to make this so difficult because we haven’t added a lot of fluff,” England added.
Lindsey, who served on the House Appropriations Committee during the Great Recession, said, “This will be a year when they focus on making sure the trains run on time.”
Taxes and tax breaks
Almost as soon as Kemp ordered spending cuts, state House Speaker David Ralston, R-Blue Ridge, announced the formation of a committee to study ways to raise more money.
The committee heard — mostly from lobbyists and industry folk — about the wonders of allowing casinos, horse racing and sports betting in Georgia. A similar committee heard much the same pitch in the Georgia Senate.
Voters would have to pass a constitutional amendment to allow casinos and horse racing. Getting it on the ballot would take the approval of two-thirds of lawmakers in each chamber, a tall order.
Legislators are also likely to give serious consideration to bills to boost tax collections from online sales — something they say customers should legally already be paying. Also, they may debate taxing rides provided by companies such as Lyft and lodging from short-term rentals.
Hill noted a dramatic increase in the cost to taxpayers of several major tax breaks, such as those for the film industry or senior citizens, although most of those are politically popular and would be difficult to tamper with, even if they wanted to.
Lawmakers may also decide whether they want to continue a jet-fuel tax break that mostly benefits Delta Air Lines. Legislators thought the tax break, which saves airlines $35 million or so a year, expired in July. But the Department of Revenue recently ruled that legislation lawmakers passed in 2018 made it permanent unless the General Assembly votes otherwise. The issue is certain to come up during the 2020 session.
As in every session, there will be other special-interest tax breaks proposed to help various businesses, saving them and costing the state treasury millions of dollars a year.
But the big decision will be on lowering the state income tax rate. The top rate was 6% for decades before lawmakers dropped it to 5.75% in 2018. The bill cutting the rate gave legislators the option of reducing it to 5.50% in 2020.
The left-leaning Georgia Budget and Policy Institute released a report in August saying the median taxpayer would receive about $42 a year from a second tax-rate reduction. Households earning more than $500,000 a year would on average get almost $2,800 a year from the cut.
Kemp won office in 2018 supporting the idea of cutting the rate even further, but that was before the impact of the federal tax bill was known.
While there may be political pressure, especially from the Republican base, to vote for another tax cut this session, opponents of making another reduction say it would tear an additional hole in the budget of about $500 million.
That’s about what it cost to give teachers a $3,000 pay raise this year.
In state government circles, the cautionary tale often mentioned is the tax-cutting experiment Kansas approved in 2012. The state went through several rounds of budget cuts, but the economic growth that was promised when taxes were slashed didn't materialize. Much of Kansas Gov. Sam Brownback's fiscal agenda was repealed in 2017, led by his own Republican colleagues.
With more budget cuts looming in Georgia, Wilkerson said 2020 isn’t the year to cut the rate again.
“I hope we are just willing to let it die and move on to other things,” he said.
England, the House budget chairman, said lawmakers committed in 2018 to consider another cut in 2020, so it will be discussed.
“Doing it,” he said, “might be a different thing.”
OUR REPORTING
August: The Atlanta Journal-Constitution reports that Gov. Brian Kemp wants agencies to develop plans to cut their fiscal 2020 budgets by 4% and fiscal 2021 budget proposals by 6%.
September: At legislative hearings, lawmakers are told the chance of a mild recession is 50-50 next year.
October: The AJC reports that agencies are calling for hundreds of state employees to be laid off, forced to switch jobs, take pay cuts or be furloughed.
November: The state announces tax collections are down 1.6% for October and off slightly for the fiscal year, a trend one top lawmaker calls “alarming.”
December: The state announces tax collections down again in November. The AJC reports that the Kemp administration plans to eliminate 1,200 vacant positions.
Georgia tax collections
Gain/loss in net state tax collections the past 12 months, compared with the same month the previous year.
December 2018
-4.5%
January 2019
-12.2%
February
+5.5%
March
+7%
April
+24.2%
May
+0.1%
June
+7.4%
New fiscal year starts July 1
July
+3.1%
August
-2.8%
September
+0.7%
October
-1.6%
November
-1.2%
Source: Georgia Department of Revenue
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