That is the question I get every time I mention the problem the state is having in meeting the state budget. I have yet to find any expert who can give me that one reason if there is only one. And frankly, all that economists are saying is that “things are slowing down” with no explanation as to why they are already “slowed down.”
To review (and beat a dead horse), state revenues through November are negative $33.5 million, which is basically flat at -0.3% growth. Through 5 months of the fiscal year, the state is under budget about $350 million. Since the recession, the state has enjoyed steady growth in revenues that has enabled leaders to catch up education spending, strengthen TRS funding, fund pay raises for teachers and state law enforcement officers and keep up with rising Medicaid costs.
So, what happened?
State revenues have been volatile basically since the federal tax cut was passed and withholding tables were lowered. 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.
Actually, the opposite has been true. A year ago, December and January revenues were negative growth months, dropping $416 million between the two months. The remaining months, February through June were positive by some $881 million and the state balanced its books at the end of June with an increase of almost $1.1 billion. So a lot can happen in those last 7 months.
But revenues were not as negative this time last year as they are this year.
There could be a number of reasons
Here’s a few ideas that while incomplete, all result in reducing revenues.
The tax cut
In the 2018 Session, HB 918 was passed that made a number of changes to the tax code in Georgia. This followed the federal tax cut and came amidst predictions of a windfall in state revenues since the Georgia’s return is tied to the federal return and would prevent many taxpayers from utilizing state deductions.
The main feature of HB 918 was a two stage reduction in the state income tax rate first to 5.75% Jan. 1, 2019 and after a joint resolution was passed, lowering the rate further to 5.5% in the 2020 Session.
Tax cut bills increased
One thing stood out in looking at the fiscal note to HB 918. There was a prediction of positive revenue for the state from phasing in the income tax cut. Total changes to the Code showed increases of $73 million, $265 million and $393 million before being faced with revenue reduction in FY 2021 of ($467) million.
In 2017, several federal tax bills caused consequences to state revenues along with disaster relief and the Airport Fuel Tax Extension Bill. These provisions showed, according to the Fiscal Note, gains of $133.3 million in FY 2018, $263.4 million in FY 2019, $201.2 million in FY 2020 and $232.4 in FY 2021
A summary of the tax changes and the phased in reduction in the state income tax showed a positive in state revenues in FY 2018, 2019 and FY 2020 before having a negative effect in FY 2021.
FY 2018--$73 million
FY 2019--$265 million
FY 2020--$393 million
FY 2021--($467) million
The Jet Tax Fuel exemption was projected to cost in a range of $19.4 to $34.9 million per year.
The point of this explanation is to demonstrate that the immediate years after the tax bills were passed were supposed to be positive and the true cost was not supposed to take effect until FY 2021….the budget we will write this session.
It is certainly no secret that Georgia’s agricultural industry has been under tremendous pressure the last few years and that has to have had some effect on Georgia’s economy. Commodity prices have sunk lower and lower and generally are under the cost of production.
The tariff war has hurt exports to China in wood, pecans and some other products that have been slower to shift to other markets.
And then there was Hurricane Michael which left a path of destruction across SW Georgia that totaled in the billions. While the state passed an aid bill of hundreds of millions in farm aid, federal disaster money came late in 2019, over 2 years from the event. The continuing effect of these pressures on the state’s largest economy has got to be substantial.
Tax credits grow and grow
Georgia has a long list of tax credits and tax exemptions that have been passed over the years and “tweaked” from time to time by the Legislature. No one is arguing that these credits and exemptions have not been good for the state, but it might be surprising to see how large many of them have grown to.
Here’s just a sample. A new report will be coming out at: http://open.georgia.gov/openga/report/list.
Credit 2012 Est. 2020 Est.
Georgia Job Tax Credit $9 Million $119 Million
Quality Jobs Tax Credit $21 Million $79 Million
Film Tax Credit $89 Million $474 Million
Research Tax Credit $7 Million $ 84 Million
Manufacturer’s Investment Tax Credit $3 Million $ 30 Million
Senior $65,000 Tax Exemption $14.9 million $998 million
There is presently no process for periodic evaluation of these credits and their effect on overall state revenues. Senator John Albers headed up a Senate Study Committee that proposed a five year reevaluation of tax credits and exemptions and a Return on Investment ratio, but legislation has yet to be passed and signed into law.