Georgia Budget Crisis: The Hole Gets Deeper

Alan Essig

Executive Director

Georgia Budget & Policy Institute

November 13, 2009

Georgia’s Short-TermRevenue Problem

FY 2009 revenues declined by 10.5% overall, and 18.1% between January and June.

Revenues for first three months of FY 2010 are down by 14.2%.

This year’s budget is based on 1.3% revenue growth.

At the beginning of the year, Governor Perdue announced more than $900 million in additional cuts (revenue decline of 4%).

Georgia’s Short-TermRevenue Problem Cont.

GSU Economic Forecasting Center projects that revenues will decline 6% this year, forcing the state budget into a deficit totaling $1.2 billion.

$900 million in cuts does not balance the budget; the state is likely short in FY 2010 an additional $300 million to $600 million.

Revenue Shortfall Reserve

Revenue Shortfall Reserve as of 6/30: $217 million.

Education Midterm Adjustment (governor can use in January): $168 million

Reserve available to close out FY 2010: $49 million.

Population Has Increased Yet Revenues Flat

02468

1012141618

Revenues(billions)

Population(Millions)

FY 2005

FY 2010

Georgia Always Has Ranked Low

49th State spending per capita

43rd State tax revenues per capita

43rd State & local sources of revenue per capita (taxes, fees, etc.)

41st Combined state revenue and state and local revenue as a percentage of income

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

Social Services

Snapshot of State Spending FY 2010

Education 58.1%

Medicaid and PeachCare 10.3%

Health and Social Services 8.5%

Criminal Justice 9.1%

Transportation 3.8%

Debt Service 6.1%

All Other State Agencies 4.0%

How Georgia Leaders Have Closed the

$4 Billion Budget Gap in FY 2010

Reserves &

Other Actions17%

Elimination of

Homeowners Tax Relief

Grant11%

Federal

Stimulus34%

Budget Cuts

38%

FY 2010 Budget Deficit Reduction Strategy: $4 Billion Total

Budget Cuts Implementation and Outlook FY 2010

Eliminate Homeowners Tax Relief Grant ($428 million) Cuts to state agencies ($1.4 billion) $300 to $600 million in additional cuts expected

FY 2011 An additional $1 billion in cuts on top of all cuts

implemented in FY 2010. FY 2012

An additional $1 billion in cuts on top of all cuts implemented in FY 2010 and FY 2011.

Medicaid and PeachCare FY 2010

$650 million in ARRA enhanced FMAP and $214 million tobacco reserve funds in base of budget.

1.3% provider rate cuts FY 2011

Medicaid shortfall of $477 million. FMAP enhanced match expires January or 2011 ($325 million shortfall) and tobacco reserves are one-time revenues.

FY 2012 Medicaid shortfall of $350 to $400 million due to remaining ARRA

enhanced FMAP leaving the base budget.

Short Term: A Balanced Approach to Deficit Reduction

General Assembly should implement a balanced approach including such options as:

Increase the cigarette tax by $1 a pack ($300 to $400 million);

Temporary 1% surcharge on family income over $400,000 ($225 million);

Scale back special interest tax breaks;

Implement policies to help collect the estimated $1.6 billion in uncollected tax revenues from all sources.

Short Term – Avoid Further Erosion of Tax Base

Further tax cuts at this time will only increase the out year deficits. So called supply-side state tax cuts will have

minimal positive economic impact with significant negative budget impact.

Moratorium on new special interest tax breaks.

Long Term: Georgia Is Facing Structural Deficit

1. Basic growth in government next year and beyond:

Increased number of students in K-12, Board of Regents, and tech schools

Increased number of enrollees in Medicaid and PeachCare

Increased number of state prisoners and aging of prison population (increased healthcare costs)

Building and repair of roads, schools, and state-owned buildings will result in increased debt service

Teacher & other state employee salary increases

Long Term: Georgia Is Facing Structural Deficit

2. Georgia has an antiquated tax system: Income tax was developed in 1937

• Brackets basically unchanged since

• Top level is $10,000

Sales tax implemented in 1951 has been dramatically narrowed

• Exemptions added yearly by legislature

• Economy has changed from manufacturing to service

Economy and the expectations of state government are radically different now

AS GEORGIANS INCOMES INCREASED, THE STATE TAXES COLLECTED FROM GEORGIANS HAVE NOT KEPT PACE

State 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

Stimulus Funds Gives Lawmakers the Opportunity to Take Action

Long-Term Comprehensive TAX REFORM

Solidify tax base to assure adequacy

Improve fairness of the tax system

Modernize tax base for a 21st Century economy

Increase accountability

LONG-TERM Solution:COMPREHENSIVE TAX REFORM

Increase Tax Transparency and Accountability: Implement a Tax Expenditure Report

Treat tax expenditures as we treat budget expenditures:

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

Estimate lost revenue

Perform cost-benefit analysis

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

Georgia Has a Structural Deficit

Can Georgia afford billions of dollars in additional budget cuts over the next two years?

Contact Info

Alan Essig

100 Edgewood Ave

Suite 950

Atlanta, GA 30303

404.420.1324

aessig@GBPI.org

Sign up for email updates at

www.GBPI.org