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Commentary: Georgia should change budget philosophy to deal with financial shortfall
1128Frank Stephenson
E. Frank Stephenson


Beginning today and continuing through the beginning of the 2011 General Assembly, The Times is taking a look at some of the key issues that Gov.-elect Nathan Deal and state lawmakers will face.

Georgia's incoming General Assembly faces a projected budget shortfall of more than $1 billion for Fiscal Year 2012. This is a daunting challenge, and after several years of budget cuts the pressure will grow to use tax hikes to fill some of the gap. A comparison of Georgia's taxes to those of neighboring states, however, suggests that legislators should increase taxes only as a last resort.

Tax burden is measured as per capita state and local taxes that Georgians pay to Georgia governments as a percentage of state per capita income. Because there are differences among the states in the division of services between state and local sectors, it is important that a meaningful interstate tax comparison include both state and local taxes. Clean comparisons also require measuring taxes as shares of income in order to control for cost-of-living differentials.

A graph of Georgians' state and local tax burden, depicted at five-year intervals from 1978 to 2008, would show that the state and local tax burden rose from 1978-1993 before retrenching somewhat between 1993 and 2003. Since then, however, Georgians' taxes have increased again, and state and local taxes now rank 16th highest among the states.

At 6.81 percent, Georgia remains well below the 8.8 percent paid by New Yorkers (the highest taxed state) to their state and local governments. While Georgians can take comfort that they are not subject to the predatory policies of the Empire State, a comparison with our neighbors is much less pleasant. Georgia's state and local tax level is higher than all its neighbors except North Carolina. Georgia's 6.81 percent is above South Carolina's 5.75 percent, Alabama's 5.44 percent and Florida's 5.15 percent. Tennessee's 4.67 percent average tax rate is more than 2 percentage points below Georgia's. (Florida and Tennessee are not aberrations; the eight lowest burdens occur in states without broad-based income taxes, such as Florida and Tennessee.)

Not only does Georgia compare poorly to its neighbors regarding the average tax rate, but all its neighbors are headed in the opposite direction. While Georgia's taxes increased between 2003 and 2008, taxes dropped in Florida by 0.9 percentage points and in South Carolina by 0.5 percentage points. This is particularly worrisome as Georgia tries to attract new firms or migrants from other states.

Happily, both Georgia Gov.-elect Nathan Deal and the commission studying Georgia's tax structure appear to acknowledge that tax increases should not be in Georgia's future.

Beyond resolving the current budget problem with spending cuts instead of tax increases and beyond reforming Georgia's tax code in a revenue-neutral manner (or better, tax cuts), Georgia should also consider implementing a tax and expenditure limitation. A tax and expenditure limitation (TEL) would allow spending to increase with inflation and population growth. It would also allow spending to increase even more if warranted, but only with a supermajority vote of the Legislature (for state spending) or a referendum (for local spending). (This would also encourage legislators to broaden the tax base by closing special interest loopholes.)

The requirement for localities might seem at odds with Georgia's home rule tradition but it is necessary in order to prevent state circumvention of its spending limit by imposing expensive mandates on local government. Also, with Georgia's relatively decentralized structure, rapid growth in local taxes could create significant hardship for city and county taxpayers.

A TEL will restrain the temptation to grow government spending as the economy rebounds and help smooth out the time path of government spending, making future recessions less painful. Instead of ramping up spending at a rate faster than inflation and population growth during boom years, TELs typically call for revenue growth above inflation and population growth to be held in rainy day funds. Those funds can be tapped during recessions in order to soften the blow of falling tax collections.

Likewise, many localities would not be in such dire budgetary straights if their rainy day funds had been more robust. This might have been possible for the state and for many localities if spending growth had been more restrained prior to the recession. Greater spending restraint during economic expansions might avoid furloughs, shortened school calendars and other unpleasant decisions in a recession.

Georgia is certainly no tax hell but both solving the current budget problems primarily with spending cuts and enacting meaningful spending restraint to slow unsustainable future spending growth should be high priorities for the new governor and the incoming General Assembly.

E. Frank Stephenson is chairman of the Economics Department at Berry College in Rome and is a senior fellow with the Georgia Public Policy Foundation, an independent think tank that proposes practical, market-oriented approaches to public policy.

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