Smaller state government in sight

The budget that legislators passed last week has a $200 million to $300 million hole that needs to be filled to fund two health care plans. It also includes cuts in college funding that will mean sizable tuition and fee hikes for students.

Lawmakers plan to spend the summer reviewing k-12, higher education and prison spending — about 60 percent of the budget.

Even if the budget holes are eventually filled, next year will mark the third in a row of significantly reduced spending by a government led by conservatives who have every intention of keeping the state fiscally trim, even as the economy and state finances improve.

“We don’t need more laws, and we don’t need more government,” said Senate Rules Chairman Don Balfour, R-Snellville.

The era of smaller government is the consequence partly of a bad economy and partly a philosophical shift that began with the previous administration, under Gov. Sonny Perdue.

The recession hammered state finances for two years, draining state reserves and forcing governments across the country to go on crash diets.

Unlike the federal government, states can’t run deficits, so states have three choices in a recession: cut spending, raise taxes, or do both.

How the state spends the money it collects — mostly from income and sales taxes — has a huge impact on Georgians.

The state helps pay for the education of about 2 million public school students, provides health care to about 1.5 million Georgians and funds all or part of the salaries of more than 200,000 teachers and other employees. The state pays for roads to be built and patrolled, criminals to be kept behind bars and forest fires to be fought; the state regulates everything from insurance and banks to real estate licensing.

After two disastrous years, state tax collections have risen throughout fiscal 2011, which ends June 30. For the first nine months of the fiscal year, collections are up 9.4 percent.

But what the state has collected in the first nine months of this year is $1.3 billion less than during the same period in fiscal 2008, before the recession kicked in.

The state budget was $21 billion a few years ago. The budget lawmakers approved for the upcoming year, which begins July 1, is $18.3 billion.

Alan Essig, a former state budget analyst who runs the Georgia Budget and Policy Institute, an Atlanta think tank, said lower state spending is the “new reality.”

“There isn’t going to be enough money for everything to come back the way it was,” Essig said.

The state has cut hundreds of millions of dollars from K-12 schools and colleges the past few years, bringing layoffs, furloughs, tuition hikes and property tax increases.

Senate Appropriations Chairman Jack Hill, R-Reidsville, said he is hoping the revenue picture improves next year and the state can, at a minimum, begin paying for the enrollment growth colleges are seeing, something that isn’t in the upcoming year’s budget.

School cuts have gotten much of the publicity in recent years because education funding accounts for more than half of the budget and cuts hit close to home for teachers, school personnel and parents.

But other agencies have taken big hits. The Department of Natural Resources, which oversees state parks and environmental regulation, has seen its budget fall from $130 million at the beginning of fiscal 2009 to $86 million next year, a drop of about one-third.

So what might come back if the state finances improve? It’s too early to tell, but don’t expect a return to past spending levels.

“I think they [state leaders] are going to be very conscious of not letting state government take off and grow,” Hill said.

Philosophically, Republican leaders have insisted they don’t want government to get much bigger. That means saving surpluses or giving tax breaks, not spending on new programs.

Revenue growth this year may provide a $700 million to $800 million surplus by June 30. However, that money will likely go into state savings that were depleted during the recession, not — with few exceptions — into new spending.

Over the summer, lawmakers want to study how the state funds schools and prisons to make sure they are adequately funded and figure out how to get the most for taxpayers’ money. In the case of prisons, they want to reduce costs by providing more alternatives to incarceration for non-violent offenders, thus cutting the number of people behind bars.

While the massive tax reform plan failed, Republican leaders remain committed to cutting taxes, especially for businesses, in hope of creating jobs.

The reform plan, which was developed by a council of economists and business people, calls for the state to cut income taxes and replace much of the lost money by applying sales tax to more goods and services.

Legislative leaders pushed a bill to lower the income tax from 6 percent to 4.6 percent, cut taxes on manufacturers, add a new flat tax on telecommunications and levy a new sales tax on car repairs and private auto sales. That bill died in the final week of the session.

However, legislators approved tax breaks that will help two major state employers, Delta Airlines and Gulfstream. They also approved a potentially costly tax break to help spur tourism. All those measures will cut how much tax money the state brings in.

Deal made it clear to reporters last week that he won’t feel bound by the legislature’s failed tax plan when he works with lawmakers to develop a new tax-cutting proposal during the upcoming year.

“I had some proposals that were not considered in the tax reform proposal,” Deal said. “I will continue to advocate for those.”

During his campaign for governor last year, Deal ran on cutting the state’s corporate income tax by one-third. If that were in place, the tax cut would have cost the state — and saved companies — about $160 million during the first nine months of fiscal 2011.

Deal also wants to cut other business taxes as well. He said his new “competitiveness council” made up of government and business leaders will look at the issue.

If history is a guide, cutting taxes could come before filling some of the holes that the recession has torn in the budget. For instance, the tax plan Republican leaders developed, but then couldn’t get enough votes for last week, would have increased next year’s shortfall by $130 million. That was never accounted for in the budget lawmakers wrote.

“If you do tax cuts, you have the worst of both worlds,” Essig said. “You aren’t filling the [budget] holes and you are endangering the budget in the future because you don’t have the reserves to even keep the shrunken budget.”

Kelly McCutchen, president of the conservative Georgia Public Policy Foundation, said states across the country, scarred by the recession, are facing a “new normal” in which they have to cut back to survive and be more conservative with how they handle taxpayer money.

But McCutchen is not convinced there won’t be the occasional slip up, a few hometown projects thrown into the budget, once the state gets a little ahead.

After all, he said, it’s human, and political, nature.

“The positives outweigh the negatives because you get to claim credit [back home],” he said. “There are some powerful incentives at play that are hard to overcome.”