Budget Issues & Revenue Solutions: CHOICES in a Challenging Economy

Alan EssigExecutive Director

Georgia Budget & Policy Institute

April 16, 2009

Major Policy Issues Facing 2009 General Assembly

Budget Transportation Trauma:shot, stabbed, or burned, you want to go to Grady… if you are south of I-20, you’re

prob. Going to die. The first hour of care is the diff between life or death (the Golden Hour). 100s of ppl are dying b/c of a lack of Trauma network, all agree, but we do not have one b/c we cannot come to the terms of raising fees to fund it. No one wants to raise the taxes. (ideological stubbornness). 60% that are crazy right… will tell the constituent whatever it is they want to hear. The STATE has to have money, we just get wishes, wants, and desires, but we cannot print our own money like FEDERAL.

Taxes Four major big political issues, other than the budget; the other three were not dealt with. Transportation

and Trauma are directly linked to the budget.

Source: Center on Budget and Policy Priorities

Minnesota is doing well, northern states are doing better. Tax system needs to be linked to the economic needs of the state. GA does an awful job with it, AL is worse. NC and VA is better than ours. High tech triangle is better, revenue is better linked to tax system. (Investments have paid off). GA has a choice, we can be like AL and MS, or like NC and VA… a forward looking southern state.

GEORGIA’S SHORT-TERMREVENUE PROBLEM FY 2009 Budget Deficit: $2.65 Billion (6.8% revenue

decline) First 9 months of fiscal year revenues declined 8.0%. March decline was 14.5%.

FY 2010 Budget Deficit: $3.3 Billion (3% revenue decline)

The only states that are not dealing with a fiscal problem are the ones with their own natural resources. GA is one of the worst, but we’re not CA; FY July 1-Fec. 2? Revenue shortfall reserve, (about 8% of revenues RIGHT now… we will use 2-3 million dollars to finish the fiscal year… which may wipe out the reserve funds. 09, 8-10% less that 08, 010, 3-4% less than 09

WHY IT MATTERSSHORT TERM

1. Already low tax-and-spend state

2. Majority of funds go to a few priorities

Consequence – Not much fat to cut so we’re cutting vital programs!!!

Myths: GA is a low tax, low spend state. We are very conservative. We don’t ask a lot, and we don’t spend a lot. We tend to be in the bottom ten. Exception: education. We fall right in the middle on edu. It is more complicated than $, we have to consider the value and quality of edu.

86%= edu. =Medicaid and PeachCare

49th State Spending per Capita

43rd State & Local Own Source Revenues per Capita (taxes, fees, etc.)

43rd State Tax Revenues per Capita

41st State Revenue and State and Local Revenue as a % of Income

Georgia Has Always Ranked LOW

Over 86% of Budget Spent on Education, Healthcare, Criminal Justice, and Social Services

Snapshot of State SpendingFY 2010

($18.6B)

Education 58.1%

Medicaid and PeachCare 8.9%

Health and Social Services (DHR) 10.0%

Criminal Justice (mostly Corrections) 9.1%

Transportation 3.8%

Debt Service 6.1%

All Other State Agencies 4.0%

FY 2010 Budget Cuts $400 million cut to K-12 funding formula

and equalization grants. $200 million cut to Board of Regents

funding formula. Approximately $90 million in programmatic

cuts across the Department of Human Resources.

Very difficult for GA GEN Assem. To increase taxes, but they do it without realizing it. EX: cut to schools, local districts can cut own budgets, or raise local property taxes, the local systems are almost forced to raise them. EX: Cut to Board of Regents= increasing tuition. HOPE mostly helps middle and upper-class kids, therefore, the tuition increase effects low-income and poor.

WHY IT MATTERSSHORT TERM

1. Already low tax and spend state2. Majority of funds go to a few prioritiesConsequence – Not much fat to cut. Instead, cutting

vital programs!!!

LONG TERM1. Already declining tax base & new low base2. Regular growth of services and needConsequence – Long-term revenue problem.

Cuts will continue!!!

There is a structural problem in GA, we will continue to be cutting things if we do not begin to fix this.

Chart 1AS GEORGIANS INCOMES INCREASED, THE STATE TAXES COLLECTED

FROM GEORGIANS HAVE NOT KEPT PACEState Revenues as Percent of Personal Income FY 1989 - FY 2010

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

We pay about 6% of income to State taxes, it goes down during recession ’92; late 90s: sales tax off of food, cut income tax, increase standard productions (90s was boom time, small ppl making a lot of money, paying a lot of taxes). ’01: high tech bubble burst, new low, took about 5 years to get back to a point considered a low. The fear now is that we will continue to stay low. Cutting taxes without corresponding cuts to services, = billions of $ in deficit. Unless we have 10-15% revenue growth per year, we will be at a constant level of 5.5%= $1.5 Billion.

DISCONNECT: ppl do not understand what their taxes go to.. We are a nation born in tax rebellion. Taxes must be paid to support our economy. PPL need to be educated.

Georgia Facing Structural Deficit – Use of One Time Funds to Balance

FY 2010 balanced with almost $400 million in one-time reserve funds and over $1.35 billion in federal stimulus funds.

FY 2011 fiscal plan calls for use of $1.1 billion in federal stimulus funds.

We only cut agency budgets by $1.5 bil. DEFINITION: ONE TIME=one time. Reserve funds and stimulus funds are one time revenues. If money is not earned and put into these base budgets, we will see the effects in 2012 HUGE DEFICITS!!

Split it over two years… this avoiding new cuts, did not make up for the ones that have already been cut.

Georgia Facing Structural Deficit – Normal Budget Growth Need approximately $1 billion in new revenues to

pay for the basic growth in government in FY 2011 and beyond.

Board of Ed & Board of Regents Growth Medicaid and PeachCare Growth Prisoner Growth and Aging of Prison Pop. New Debt Service Teacher and State Employee Salary Increases

The GA budget grows naturally. We are a fast growing state. X$/student. Two things will increase in spending: 1=higher edu, 2=Medicaid and PeachCare. As ppl lose jobs, they lose health ins. And go back to school. Every 1% salary increase is $200-300 mil! The budget will increase about $1 bil/year… so if there is no productions, we will fall short, we need 5% growth just to stay even.

Projected Deficits

•FY 2011 = $823 million

•FY 2012 = $1.9 billion

See worksheets: GA Faces Large Deficits in FYs 2011 and 2012.

FLAT TAX: everybody pays the same percent of taxes, supposed to be “fair.” He thinks a progressive tax is “fair.” On FED level, it is somewhat progressive, state is actually regressive.

REVENUE SOLUTIONS FOR OUR REVENUE PROBLEMS

SHORT-TERM:

BALANCED DEFICIT REDUCTION Targeted and prioritized budget cuts Strategic use of RSR Federal assistance Revenue enhancements

We can no longer live in “fantasy world”. The fed govt has been able to b/c they can decrease taxes and just print more money. They have been making the easy decisions, give ppl more money and more services. The state cannot do this! Our decisions need to be made based on the facts. We are facing bill of dollars of deficits. We will have to either raise revenue or cut services… we need to fully think about what those implications are.

2/3 cuts; 1/3 increase.

SHORT-TERM:Revenue EnhancementsEconomic Argument – “Basic economic theory suggests that direct spending reductions will generate more adverse consequences for the economy in the short run than either a tax increase or a transfer program reduction.” -Joseph Stiglitz and Peter Orszag

Historical Argument – In response to recessions in the 1980s, 1990s, and 2000s, a majority of states raised revenues. (Source: NASBO)

Practical (and perhaps Moral) Argument – “The only solution, if we want to preserve the priorities of classroom instruction, healthcare and public safety, is to raise new revenue.” - Governor Steve Beshear, Kentucky

SHORT TERM:Revenue Enhancements Options

Increase Cigarette Tax by $1 pack = $442 million (House Bill 39)Other states – Kentucky governor signed a bill to double the cigarette tax on

Feb. 13. Mississippi, Kentucky, Virginia, South Carolina, Florida and Kansas currently considering cigarette tax proposals.

Lower cap or implement income ceiling on various tax credits and exemptions.

Other states – Connecticut, California, New Jersey,Oregon, and Kansas have either scaled back tax breaksor are considering proposals to do so.

GA ppl support increase in cig. Tax. Teenagers are extremely price sensitive in regards to starting smoking. The higher $ of cig, the less likely it is that teens would start, which would decrease health care costs in 20-30 yrs.

Misguided Tax Policy HB 261

Temporary 1.2% tax credit for purchase of home ($1,800 maximum credit).

Cost to State – Approximately $85 million $75,000 per additional home sold

HB 481 Temporary $2,400 tax credit to hire unemployed worker.

• Cost to State $850 million.• $265,000 per additional job created.

Decrease Capital Gains Tax by 50% ($400 million cost)• 99% of benefit goes to top 20% income. 77% of benefit goes

to top 1% of income

STATE economist projected that both bills will have a marginal impact on the economy, 261 will have additional cuts of $50 mil in 010. 481 will cost state $400 mil. 2012 will add 1.2 bil to deficit

REVENUE SOLUTIONS FOR OUR REVENUE PROBLEMSLONG TERM:

COMPREHENSIVE TAX REFORM Solidify tax base to assure adequacy Improve fairness of tax system Modernize tax base for a 21st century economy Increase accountability

SR 453

LONG TERM:Tax Transparency and Accountability

Tax Expenditure Report –Treat tax expenditures as we treat budget expenditures.

Highlight all tax breaks currently in law(sales, income, property).

Estimate lost revenue.

Perform cost-benefit analysis.

39 states do this, but Georgia does not!SB 206

REVENUE SOLUTIONSBudget policy and tax policy must be linked. You get what you pay for!!!

We need to be practical in our thinking. What to fund, how much, when. What do we fix/not fix. Everything costs money. It is a huge problem that everyone is afraid to discuss.

Gov. is really good fiscal steward of the State.

Policy Priority effects change. We need to judge things by outcomes, continue with the things that work, and get rid of the things that do not. (Republicans are good at this).

The efficiency argument: any $35 bil org. private sector vs state, stacks up. ReDirect 5% cuts, 3% adds (Theory) it turned into taking all cuts and giving almost no adds. State agencies should focus on being as efficient as possible.

Contact Info

Alan Essig100 Edgewood Ave

Suite 950

Atlanta, GA 30303

404.420.1324

sbgehl@gbpi.org

Sign up for email updates at

www.gbpi.org