Taxing and spending is going from bad to worse

By Scott Beaulier

Georgia is at a financial crossroads. By law Georgia is required to balance its budget each and every year, and in this time of financial turmoil for many — layoffs, foreclosures, lower corporate bottom lines — revenue for the state is understandably down. Meanwhile, at a time when revenue is down, spending is up.

This leaves our state’s leaders faced with a choice to raise revenue by raising taxes, or to cut spending. It is critical to the financial health of the state that we all understand the implications of the revenue and tax-raising proposals being considered in the state Capitol.

Despite his tough talk about fiscal responsibility, much of the growth in government size — nearly 70 percent of it, in fact — has been on Gov. Sonny Perdue’s watch.

In the past 10 years, Georgia’s annual state expenditures have more than doubled. Georgia now faces one of the most challenging budgetary moments in history as policymakers attempt to close a $1.4 billion gap in the budget.

Many ideas have been proposed to cover the gap. A number of policymakers have been exploring tax increases, and taxes could go up on everything from hospital beds to cigarettes to capital gains. In addition to excise taxes, the Georgia Assembly is fine-tuning regional special purpose local option sales taxes that will make it easier to levy sales taxes on rural, poor counties.

Taken as a whole, the taxes will increase Georgia’s already heavy tax burden.

Taxes are burdensome in that people must pay more, and most of the taxes proposed are highly regressive (i.e., they hit the poor particularly hard).

Furthermore, they are set to be introduced at the most inappropriate moment in the business cycle: tax increases during an economic recovery period never make sense and have the potential to kill the recovery.

In sum, increasing taxes on the poor during a recovery is a tried and failed strategy that will stifle growth and perpetuate Georgia’s already high rates of unemployment.

The additional taxes also will fail to deliver the tax revenue their advocates promise.

Assuming tax rates are too high already, additional tax hikes have the potential to produce less revenue by causing a significant reduction in the activity being taxed.

Regardless of their effect on revenue, the taxes will make Georgia a less attractive place to do business.

Georgia’s business tax environment is already 29th out of the 50 states, according to the Tax Foundation.

If Georgia’s policymakers plow ahead with proposals to increase sales and property taxes, our state’s ranking will worsen in the future. Lower rankings mean lower incomes, fewer jobs for Georgians, and higher poverty rates.

Instead of raising taxes on the poor, spending and taxes should be cut and growth-enhancing policies should be introduced.

Promoting growth is quite simple and requires little more than lower taxes, reduced regulation, and a smaller public sector.

As the Mercatus Center’s Personal Freedom Index shows for states in the U.S., freer states are more prosperous.

When states are aggressive in cutting taxes and expenditures, they attract more people and more entrepreneurial talent.

In response to tax rates, people “vote with their feet” and leave states like California and Michigan where taxes are high and move to states like Colorado, North Dakota and Tennessee where taxes are less oppressive. When more people and more entrepreneurs relocate, more jobs are created.

In a new report titled “Increasing Taxes During a Recession: The Wrong Medicine for Georgia,” my colleague Mark Adams and I offer up several budget recommendations for Georgia policymakers.

The report discourages the introduction of any new taxes that will disproportionately harm the poor, and it calls for significant cuts to the size and scope of government in Georgia.

It recommends spending rules be adopted to prevent future crises from developing, and it calls for deeper spending cuts and for privatization of some public services.

It also encourages officials to engage in a careful assessment of the functions that must be handled by the state and recommends more functions be handled by the market instead of by government.

The report is being released now because Georgia is at a dangerous crossroad in its history.

Perdue is also at a crossroad in his career that he described in his State of the State as “the last lap around the track.”

While time’s running out on this Georgia Assembly session and on Perdue’s tenure, we can only hope the governor reverses direction in this last lap.

Reversing direction would imply an end to his steady pace of tax-and-spend policies.

While it is unlikely his reversal in direction will undo seven laps in the wrong direction, the governor has nothing to lose at this point and ought to sprint as hard as he can by cutting expenditures and taxes.

Fiscal austerity is the necessary direction for Georgia to be running, and it is the one we hope Perdue and our state leaders have the courage to embrace.

Scott Beaulier is the BB&T Distinguished Professor of Capitalism and Department Chair of Economics in the Stetson School of Business and Economics at Mercer University in Macon. He is also a Distinguished Fellow at the Laffer Center for Global Economic Growth, which sponsored the study.