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Hill: The stark fiscal reality
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Entering the fiscal year 2010 budget, the state faces a very sobering reality. In the last session, the General Assembly cut $3.1 billion from the FY10 state budget. This budget plan, adjusting for inflation and not counting federal stimulus dollars, brings per capita state spending to levels not seen since the mid 1990s. When lawmakers left Atlanta in the spring, it was assumed that the budget, while painful, was decreased enough to weather the tough revenue collections. As the fiscal year begins in July, that does not appear to be true.

While audited figures are still not in for the FY2009 budget, last year’s revenue collections were over a half billion dollars short of the projections, draining the rainy day fund.  What’s worse is that even with $3.1 billion cut from the budget, the FY10 budget proposes to spend more than the state collected in FY09. The question that we will examine this week is: Are the worst revenue collections behind us or do lawmakers need to reduce the budget even more? Because individual income taxes and sales taxes make up about 84 percent of revenue collections, analyzing these two categories will allow us to make some fairly accurate predictions.

Income taxes

As mentioned in past columns, individual income taxes make up half of total revenue collections. Since June of last year, income tax collections have declined 12.2 percent — a direct result of many people losing their jobs, the collapse of the home building industry and numerous other factors. In that period of one year, Georgia’s unemployment rate has risen from 6.2 percent to 10.1 percent — a 63 percent increase.  Most of this decline occurred in the second half of the fiscal year. Average monthly income tax revenues were $716.7 million from July though December but were $583.5 million for January through June.

Dr. Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University does not forecast job losses leveling off until the second quarter of 2010 — just as the fiscal year is ending. His analysis of the recessions of 1973 and 1981 reveal that it takes about six quarters (1.5 years) for job losses to reverse to job gains. What remains to be seen is if the federal stimulus plan, which attempted to limit job loss at the state level and added many construction jobs, can reverse this trend quicker than projected.

Dr. Dhawan’s theory matches national predictions and Georgia has closely followed the rise in national unemployment. Dr. David Wyss, the economist for Standard & Poor’s recently presented very similar projections for the national recovery at the National Conference of State Legislatures. He projects that the country will see the bottom of the recession in September or October, but job losses, which are a lagging indicator of economic recovery, will not turn around until mid-2010 in his most optimistic scenario.

These predictions all suggest that the revenue pattern of the last half of FY2009 is likely to continue, if not decline somewhat, through FY10. A flat line projection, assuming no further decline, suggests income taxes alone in FY10 will be at least $800 million below FY09.

Sales and use taxes

Sales and use taxes account for approximately one third of revenue collections. Sales tax collections were down almost $1 billion for local and state collections in FY09. Personal savings rates were at 4 percent in March, compared to 1 percent two years ago. Consumer confidence remains low and consumption is not expected to level out until the second quarter of next year — again, the end of the 2010 fiscal year. So, there does not appear to be much of an increase in retail sales in the near future.

If the state brings in sales tax comparable to the last half of the year, this will create an additional $200 million shortfall. Optimistically, if consumer confidence stabilizes and unemployment has no effect, the state might expect to bring in around the same amount as last year.

Should we reduce the budget more?

Neither of these projections for sales or income taxes includes the additional $235 million in income tax refunds left over from FY09 or the $300 million shortfall that occurs simply because the FY10 budget has exceeded FY09 actual revenues. Thus, any projection has to automatically add $535 million to the total. The income tax and sales tax trends suggest optimistic shortfalls of $800 million to $1 billion. These projections also do not account for other state revenues that might also be affected by the economic situation. Adding in $535 million suggests the state should be planning for a FY10 shortfall of at least $1.3 to $1.5 billion.  

Georgia is certainly not alone in the way the state is addressing the shortfall. Most other states are reducing salaries, or furloughing and laying off state employees as well as teachers. Most state agencies in Georgia were already furloughing many employees before the governor’s announcement of the three day statewide furlough.  

This crisis is genuine and it is critical for all Georgians to come together to get past this difficult time.

I may be reached at
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