Gov. Deal’s plan stirs revenue questions

With a series of initiatives during the past week, Gov. Nathan Deal has shifted the state government’s economic engine into forward.

The governor offered modest increases in overall spending — especially for education — while proposing tax changes and investments that aimed at both long-run improvements and a short-term bump in hiring.

If Deal’s proposals are accepted, the state may not spark a burst of hiring, but it will trim costs for businesses right away and make investments that improve Georgia’s economic potential.

Deal’s proposal for business tax breaks drew mixed reviews — many economists are skeptical that the idea will actually mean more hiring. But the governor’s plans to spend more money on transportation, education and water supplies drew wide support.

“Infrastructure is a particularly cost-effective way of generating growth,” said Andrew Fieldhouse, budget analyst at the Economic Policy Institute in Washington, D.C.

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“There are paychecks to the workers, who will spend the money. Plus, the state of Georgia will spend less on unemployment benefits and also collect more tax revenues.”

Among the governor’s economic initiatives:

● Removal of the sales tax on energy used in manufacturing.

● Cuts in sales and use taxes for construction materials used in big projects.

● Broadening of tax credits for adding jobs.

● Sales of bonds to deepen the Savannah harbor.

● Construction of new reservoirs.

● Support for the transportation referendum.

Almost as important as the various changes is the way they will burnish the state’s reputation when advocates go marketing around the country and around the globe, said Sam Williams, president of the Metro Atlanta Chamber.

“We need to do a better job of selling the state,” Williams said. “Being seen as business-friendly goes a long, long way.”

The governor did trim some programs. And the additional money he allocated for education did not make up for past cuts or provide raises for all teachers.

Moreover, the state government’s freedom of action in tough times is limited. By law, its budget must be balanced, so it cannot boost overall spending when layoffs, bankruptcies and a depressed housing market chill tax revenues.

But those receipts have lately been growing.

And the governor touted his choices about where to spend money as a boost to an economy that badly needs help.

Georgia unemployment has been above the national average since the summer of 2007. The state shed a stunning 373,199 jobs — 7.7 percent of the total — before a modest improvement started last year.

Despite that, Georgia is still about 290,000 jobs shy of the pre-recession peak.

To make up that lost ground in the three years remaining in Deal’s current term, the state would need to average 96,000 jobs a year — more than three times as much as will be added this year, according to the Economic Forecasting Center at Georgia State.

That kind of trouble is relatively new for a state that had been among the nation’s leaders in growth for decades. Incentives, a light regulatory climate, a lack of unions, low costs and low taxes — along with a network of universities — enticed many companies to move in.

Georgia hiring typically outpaced the nation. Georgia recessions were mild and brief.

The trend has changed — and so should the state’s economic development plans, said Alan Essig, executive director of the Georgia Budget and Policy Institute.

“I think we need to change our philosophy,” Essig said. “It may have worked in the 1980s and ’90s. But over the last 10 years, it has been a failure.”

He bitterly criticized the lack of data on how well business tax breaks have worked and how much they have cost.

“We are 51st in job growth since the recession, and we are just doubling down on the same failed policy,” he said.

Virtually no one — including the governor’s office — predicts how many jobs the new initiatives might produce. Economists often debate the value of tax breaks — many argue that they add to private profits or subsidize hiring that would have happened anyway.

Short-term incentives are simply aimed at the wrong problem — taxes are not the obstacle to hiring, said Lloyd Chapman, director of the American Small Business League, an advocacy group with thousands of member.

“These all sound good, and it doesn’t look like it will hurt,” he said. “But most tax cuts are insignificant. Small business needs orders, they need customers, they need their sales volume to go up.”

Robert Chirinko, professor of finance, University of Illinois at Chicago is also on the side of the skeptics.

The energy tax, for example, is good only for manufacturers, he said.

“That strikes me as a very narrow benefit,” Chirinko said. “There are a lot of other businesses operating in the state of Georgia. They also would like to have lower taxes.”

Yet perhaps the biggest unanswered question about the litany of tax breaks is how to make up for whatever revenue is lost, he said.

“When you cut a tax, something else has to give in the budget,” Chirinko said. “So just tell me, whose tax are we going to increase?”

The tax breaks would deprive the state of revenues — perhaps as much as $180 million just from forgoing the energy tax, according to the governor’s office.

The total shortfall depends on how successful the incentives are, said spokeswoman Stephanie Mayfield: Hiring, expansion and growth would mean more revenues from taxes on income and purchases.

“Companies investing in Georgia drive revenue up,” she said. And while no one predicts a huge burst of growth, some experts say the tweaking of taxes will help — and soon.

For instance, the most likely short-term hiring burst among Deal’s proposals is the widening of a tax credit for adding jobs, said Kevin Klowden, managing economist with the Milken Institute.

The credit now applies to adding 50 jobs. Deal wants it widened to apply when a company adds 15 or more jobs.

“That’s a big thing,” Klowden said. “People tend to forget that most hiring in a recovery is by small and middle-sized businesses.”

The elimination of the energy tax for manufacturing would put the state on the same footing as its neighbors. And while the manufacturing sector represents less than 10 percent of the workforce, it often provides better than average wages.

Exports have been among the bright spots in the economy, so eliminating energy taxes would allow manufacturers to expand, argued Chris Clark, president and CEO of the Georgia Chamber of Commerce.

“I think that will have an immediate impact,” he said. “There are thousands of businesses affected. Anything we can do is going to give them some relief.”

That argument is common — that many companies want to expand but are hesitant in the face of uncertainty or fear.

Ironically, the most widely praised components of the governor’s plan are those least likely to produce a quick economic payoff: Building roads and rail, bettering schools, adding water supplies — all good for the economic potential of an area. Likewise, in a region already driven largely by trade and logistics, is the improvement of a major port.

When the Panama Canal is expanded in two years, larger ships will pass through it. If Savannah is not ready to handle them, those ships — and their tens of billions of dollars in goods — will go somewhere else.

The governor’s plan to raise $46.7 million in bonds for deepening the port will be amply repaid to the region, said Jeff Humphreys, director of the Selig Center on Growth at the University of Georgia.

“It is difficult to overstate the importance of deepening Savannah harbor,” Humphreys said. “The expansion of the Panama Canal is a game changer for Georgia.”

The latest initiatives also raised larger questions about strategy — how should the state promote its own economy. The pain of the last four years is blamed mainly on the burst of the housing bubble. But the future, Humphreys said, does not depend on a return to real estate.

Instead, the state should dismantle obstacles to forming new companies and to expanding existing firms.

It also must keep trying to lure businesses looking to move, he said.

“Georgia used to out-perform the rest of the country and to out-perform again, you need to focus on economic development strategy,” he said.

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