Georgia orders budget reductions while eyeing tax cuts

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Saying he wants to keep the size of government in check, Georgia Gov. Brian Kemp has ordered state agencies to reduce spending by 4% in the current budget and by 6% in their proposals for the fiscal 2021 budget.

Kemp said years of “strong, conservative leadership and pro-growth policies” have kept the state’s economy thriving.

“To secure an even brighter future for our state, we must continue to budget conservatively, spend wisely, and put Georgia taxpayers first,” he said. “That's why I have instructed all state government offices to reduce expenditures and streamline operations through proactive leadership.”

Kemp, a Republican who took office in January, said his budget cuts will protect the state’s coveted AAA general obligation bond ratings, and will implement his “four-point plan,” which includes making Georgia a better place for small businesses by cutting obsolete, unnecessarily burdensome, and bureaucratic regulations and maintaining a competitive tax environment.

The credit-positive budget cuts highlight Georgia’s conservative fiscal management, which includes both a willingness to maintain a balanced budget and a cautious eye toward maintaining the state’s fiscal health over the next three to five years, said Moody's Investors Service.

“The willingness and ability to successfully balance the budget, including through expenditure cuts, is a hallmark of a strong credit profile,” Moody’s analyst Joshua Grundleger wrote in September. “The state is planning to cut taxes and raise teacher salaries, so advance spending cuts to maintain balance and indeed maintain fiscal strength should a recession begin in the next couple of years, underscores the state’s responsible governance.”

The cuts requested by Kemp come amid relatively rapid revenue growth, Grundleger said. The state's tax receipts grew by 4.8% in fiscal 2019, driven by strong performance in corporate income tax, up 26.6%, and net sales and use taxes, up 5.3%.

While revenues grew in 2019, that doesn’t mean the size of government should grow in fiscal 2020 and 2021, Kelly Farr, director of the Office of Planning and Budget, said in an Aug. 6 memo to state agencies.

“We should seek to keep as many dollars in taxpayer hands as possible to grow our economy instead of state government,” Farr said, ordering the governor’s budget cuts.

Farr said agencies should begin implementing 4% reductions by Oct. 1 to mitigate the need for larger reductions in the latter half of the fiscal year.

In the first three months of fiscal 2020, state tax collections have been uneven. In July, revenue collections were up 3.1% year-over-year, in August they fell 2.8%, and in September revenues were up by only 0.7%, according to the state Department of Revenue.

The nonprofit Georgia Budget and Policy Institute says Georgia faces mounting shortfalls in fiscal 2020 due to lagging income tax and sales tax collections, which make up nearly 80% of funding needed to operate the state government.

Under the budget enacted this year, Georgia’s general fund revenue estimate of $26.1 billion for fiscal year 2020 expected personal income tax collections to grow by $577 million, or 4.7%, over what the state collected last year, and net sales tax revenues to increase by $275 million, or 4.4%.

“If growth were distributed equally across 12 months of the 2020 fiscal year, the state would currently stand $200 million short of its estimated revenue from these two sources, based on reported tax collections from July through September,” GBPI said. “Last year, the first quarter of the fiscal year generated 24.6% of total income tax collections and 24.9% of sales tax, approximately one quarter of the total yearly collection for each tax.”

To meet the 2020 estimate, personal income tax collections must grow by an average of 6.4% over the next nine months and sales taxes by an average of 5.3%, according to GBPI. Through the first three months, personal income tax collections are down 0.5%, returning $14 million less to the state than the DOR collected during the same time frame in fiscal 2019.

“In part, Georgia’s lagging revenues can be explained by the fact that the state continues to experience high volatility in income tax collections due to the major policy changes initiated by the federal Tax Cuts and Jobs Act of 2017 and Georgia’s response of 2018,” GBPI said.

Georgia's House Bill 918 signed into law on March 2, 2018, reduced the top corporate and personal income tax rates to 5.75% from 6%, and doubled the standard deduction, changes that will sunset at the end of 2025 along with certain provisions of the TCJA.

The combined effects of the federal and state policy changes “substantially increased” the percentage of Georgians filing their income taxes using the standard deduction to an estimated 86% of households from 69%, GBPI said.

According to Moody’s, Kemp’s spending reductions “come at a time when a number of potential fiscal challenges loom.”

If new legislation is passed next year, the top income tax rate will be reduced further to 5.5% from 5.75%.

The state expects the impact of HB 918 on revenues to be an added $393 million in fiscal 2020, but reductions would follow of approximately $470 million in fiscal 2021 and $340 million in fiscal 2022, assuming the tax rates are lowered again, said Grundleger, the Moody’s analyst.

The governor has also indicated that he wants to pass an additional teacher pay increase of $2,000 over the next several years, fulfilling the total increase of $5,000 he campaigned on, Grundleger said.

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