Georgia Budget Crisis: The Hole Gets Deeper Alan Essig Executive Director Georgia Budget & Policy Institute November 13, 2009

Georgia’s Short-Term Revenue 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-Term Revenue 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

Georgia Always Has Ranked Low 49 th State spending per capita 43 rd State tax revenues per capita 43 rd State & local sources of revenue per capita (taxes, fees, etc.) 41 st 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 SpendingFY 2010 Education58.1% Medicaid and PeachCare10.3% Health and Social Services8.5% Criminal Justice9.1% Transportation3.8% Debt Service6.1% All Other State Agencies4.0%

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 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

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 21 st 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 Sign up for updates at