Georgia's finances demand quick focus from Deal

By James Salzer

The Atlanta Journal-Constitution

Gov.-elect Nathan Deal will take office facing a sluggish economy, a continuing budget crisis, a financially unstable HOPE scholarship program, a revenue system some say needs updating and an electorate in no mood for anything that smells of a tax increase.

He will have to write an $18 billion state budget and likely decide whether to support a proposed new tax system even before the 2011 General Assembly convenes Jan. 10.

Sometime next year, he may also have to help craft a plan to save HOPE, the highly popular college scholarship program, from going broke. And he plans to push tax-cut legislation that he hopes will help spur economic investment in Georgia.

Brian Robinson, his spokesman, said the governor-elect will jump into budget meetings Monday and that working on the state’s troubled finances “will be our primary focus.”

That’s with good reason. Despite $3 billion in recent budget cuts, analysts say the state faces another shortfall of up to $2 billion in the coming fiscal year.

That could mean further cuts to schools, health care, public safety and parks programs.

“He’s got the greatest challenges of any incoming governor in the past 50 years,” said state Sen. George Hooks, D-Americus, former Senate budget chairman and a legislative historian.

Gov. Sonny Perdue came into office in 2003 facing a $620 million shortfall as state finances struggled to recover from the post-9/11 economic slowdown. Perdue’s predecessor, Roy Barnes, had already ordered some spending cuts and the state had more than $700 million in reserves.

Deal takes office after two years of hefty cuts. The state has about $200 million in reserves. A few weeks after the current fiscal year began July 1, Perdue ordered a new round of 4 percent cuts to most state agencies.

That could hold the state for the rest of this fiscal year because tax collections are improving. But next year, the federal stimulus money that has been propping up the state budget runs out.

As Perdue did when he took office, Deal has promised to find new areas to trim in the budget, which in turn would help him pay for tax cuts. Some legislative leaders say entire departments may have to be dismantled, although they don’t specify which ones. They argue that the state can’t afford to do everything it does now.

Cuts in the past two years have brought limited layoffs but widespread employee furloughs, higher college tuition, increased user fees and, in some cases, bigger property tax bills. Further cuts could bring more of the same, particularly if lawmakers again cut k-12 funding to local school systems.

“This may be the worst budget we’ve had to deal with since the beginning of the downturn,” said House Appropriations Chairman Ben Harbin, R-Evans.

Deal, a former state Senate leader, has made it clear that the shortfall won’t be counterbalanced with higher taxes. The governor-elect said he won’t support a tax increase. And he specifically has opposed levying the state’s 4 percent sales tax on all groceries, something that has been talked about in recent years.

Considering that voters angry in part over government spending sent a record number of Republicans to the General Assembly this year, Harbin said it’s unlikely anyone will even raise the issue.

“No one is going to support a tax increase after that election,” Harbin said.

Rewriting the tax code

Deal will, however, consider a plan to rewrite the tax code, a proposal that would change the taxes Georgians pay.

A panel called the Special Council on Tax Reform and Fairness — composed of business people, economists and the outgoing governor — has been working on the changes since July. It is expected to announce its recommendations in December or early January, and lawmakers will consider them during the 2011 session.

The council was charged with creating a modern, simple, fair and business-friendly tax structure.

Georgia’s tax code is a crazy quilt system modified virtually every legislative session. It relies heavily on income and sales taxes. With a few exceptions, lawmakers annually add exemptions to the code for select businesses and special interests — often at the behest of lobbyists.

The code hasn’t changed with the economy. While services — haircuts, oil changes and tax preparation services among others — have become a larger part of the economy, most services aren’t subject to a sales tax.

Republican leaders and some economists support redirecting the state’s taxing emphasis to what people buy and the services they use rather than the income they earn. Cutting taxes on business inputs — for instance, energy used by manufacturers to make a product — would help make those businesses more competitive and allow them to hire more workers, they argue.

On the other hand, advocates for the poor and elderly stress that those groups spend a higher percentage of their income on goods and services that would be taxed under the Republicans’ scenario. So, cutting income taxes and making people pay more in sales taxes would provide a tax break for upper-income Georgians and make the poor pay more, they argue.

No clear consensus

The council didn’t get any kind of clear consensus about what Georgians want during a series of public hearings the tax council held around the state.

Mostly, council members heard from people who want to keep tax breaks they have now or get new ones.

Several farmers and others in agriculture showed up at the hearings. Georgians who work in agriculture have gotten a host of sales tax exemptions over the past 20 years. But, they pointed out, they are a major economic driver in rural Georgia.

Bud Butcher, a longtime Coweta County dairyman, testified that applying a sales tax to things such as feed and seed would cost him $45,360 a year.

“It will be a constant drain on the bottom line. To be absolutely honest, I do not know whether we can meet the obligation and remain a viable operation,” he said.

Manufacturers, from carpet and box makers to newsprint producers, requested the elimination of the sales tax on the energy they use. The legislative debate on that issue in the past has snagged on the cost: In 2008, it was estimated at $140 million.

Kelly McCutchen, president of the Georgia Public Policy Foundation, an Atlanta think tank, said he would like to see the council’s plan include eliminating sales taxes on the energy that manufacturers use, an expansion of the sales tax base to include more services and a lowering of income tax rates.

“The most important thing we can do for the economy is lower the income tax rate,” said McCutchen.

Jeff Martin of Marietta testified before the council, and he said in an interview that the state needs to move toward taxing consumption and away from taxing income.

“That needs to be national, too,” added Martin, president of an insurance and financial services firm. “We have over 50 million visitors to this country every year. If they make a purchase, they are paying taxes. Look at the revenue that would generate.”

Deal ran for governor touting his own tax plan, which his staff said has been given to the council for its consideration.

Deal wants to cut the corporate income tax by a third, eliminate or temporarily exempt other business taxes, cut income taxes on married couples and set a flat income tax rate.

“He has a mandate to push his plan,” Robinson said.

Deal is hoping such tax cuts spur investment and help create jobs.

Beverly Jenkins, an unemployed former program manager from Stone Mountain, said jobs and education should be Deal’s top priority.

“Georgians need to be provided with opportunities to work so that we can continue to support our families,” she said.

Political ‘third rail’

Whatever Deal does on the budget and taxes will be politically tricky. Solving the financial problems of the ultra-popular HOPE scholarship program won’t be any easier.

HOPE has often been described as the “third rail” of state politics — touch it and you get fried.

HOPE provides full tuition and book and fee money to college students who maintain at least a ‘B’ average.

HOPE and pre-kindergarten classes are funded by lottery proceeds. Although Georgia’s lottery is considered one of the most successful in the country, its revenues aren’t keeping up with the growth in the cost of the programs.

Lawmakers hoped they had fixed the program’s financial woes in 2004 by tightening up qualifications for HOPE.

But last fiscal year lottery revenue didn’t generate enough to pay for the programs and state officials had to dip into a $1 billion reserve fund.

Next summer, book allowances will be cut in half, to $150, for HOPE students. Without changes, experts say HOPE’s finances will only get worse.

The Georgia Student Finance Commission, which administers HOPE, has worked on some recommendations to present to Deal and lawmakers.

‘Fit for the job’

House Rules Chairman Bill Hembree, R-Winston, said Deal will have to make some tough choices involving state finances, taxes and programs pretty quickly. But he said the new governor’s personal makeup is a perfect fit for the job.

“He will be a great governor in the perspective that he sees the big picture,” Hembree said. “I served under Zell Miller, I served under Roy Barnes and I served under Sonny Perdue, and they all tended to be micro-managers of issues.

“From what I have seen from Nathan Deal, he sees the big picture economically as well as the direction the state should go.”

-------

How we got the story:

A reporter with 20 years of experience covering state budget and tax issues reviewed the governor-elect’s tax plan, read tax studies and more than 80 transcripts of testimony before the Special Council on Tax Reform and Fairness and interviewed state officials, council members, analysts, budget experts and voters for this story.