With talk of a possible recession this year, and despite continued growth in income and sales tax collections, the Kemp administration and legislative leaders say they expect more conservative budgeting when the General Assembly reconvenes Jan. 9.
Many Georgians may not notice, but it’s important to hundreds of thousands of teachers, education staffers, state employees, retired workers and contractors who depend on what legislators allocate every winter when they meet.
“I think it’s pretty obvious there is going to be some economic slowdown,” said state Senate Appropriations Chairman Blake Tillery, R-Vidalia. “It’s important to remember we have made a lot of major moves over the past two, 2 1/2 years. This year is going to be a time when we’re going to want to go a little slower.”
That doesn’t mean there won’t be some financial goodies for Georgians. After another record surplus in the fiscal year that ended June 30, the governor wants lawmakers to refund about $2 billion to taxpayers. That would come in the form of an income tax refund — similar to the one last year that meant $500 for joint filers — and a property tax break that he said would save homeowners about $500.
In a Republican-dominated General Assembly, it’s almost certain his proposal will pass, unless lawmakers want to give away even more of the surplus.
But that’s one-time money the state is sitting on. Kemp and lawmakers are well aware that tax collections — which pay for ongoing expenses — could slow in a recession.
“I expect belt-tightening ... and for people to be getting their money back,” said state Rep. David Wilkerson, D-Powder Springs. “I can’t see the pay raises and the money being given out like it was last year.”
Going from really good to maybe not so good
The $33 billion or so the state spends helps it educate 2 million children, provide health care to more than 2 million Georgians, manage and improve parks, investigate crimes and incarcerate criminals, and regulate insurance firms, utilities and dozens of professions. The state issues driver’s licenses and helps pay for nursing home care for the elderly.
The state is a major provider of treatment for mental health and drug addiction, and it helps fund public health programs. Besides paying salaries, it helps make sure former teachers, university staffers and state employees receive pensions and health care.
Kemp, who won reelection handily in November, has until now had a lot of financial flexibility because state tax collections have been on a roll for more than two years.
Nothing, from previous talk of a national recession to the slumped stock market to rising interest rates, has so far dented Georgia’s revenue picture.
The state’s surplus for fiscal 2022, which ended June 30, was about $6.6 billion.
State income tax collections have been on the rise since shortly after the beginning of the COVID-19 pandemic, when Congress first passed massive federal aid spending. Inflation then helped boost sales tax collections, with goods costing more and the taxes on them rising, and wages have also increased as unemployment hit record lows and businesses scrambled to fill job openings.
Collections have continued to grow during the first half of this fiscal year, but Kemp’s budget director, Kelly Farr, expects that flow to slow in early 2023.
“One of the things I feel pretty confident about: We will not have the same revenue this year in April as we did last year,” Farr said.
That’s in part because experts don’t expect the economy to be as strong in 2023.
Julia Coronado, founder of the New York-based economic research firm MacroPolicy Perspectives, said she expects a rocky year for the economy nationally but predicted a “near miss” on a significant downturn, in part because of the tight labor market. Companies, she said, have had to work hard to hire workers the past few years.
“We are hearing from companies that they are very reluctant to lay off workers,” she said, even in a slowing economy.
Economists at the University of Georgia’s annual Georgia Economic Outlook last month predicted a mild, short recession for the state in the second quarter of 2023.
It isn’t expected to be anything like the Great Recession, when governments slashed billions of dollars in state spending and cut jobs, a downturn the state budget took nearly a decade from which to recover.
Retrenchment after election-year spending
Since taking office in 2019, Kemp, who served in the Georgia Senate during an earlier downturn, and his staff have kept a close eye on state finances.
He was concerned enough about a possible recession in 2020 before the COVID-19 pandemic hit to order state agencies to cut spending 4% in the midyear budget and 6% the following year. Fears of a long downturn brought a budget with $2.2 billion in spending cuts, with K-12 schools taking the biggest hit because the state spends more on education than anything else.
But the spectacular rise in tax collections made talk of job cuts and program eliminations quickly go away. The state collected record revenue in fiscal 2021, then again in 2022, creating massive surpluses that spurred big spending in a year in which Kemp was running for reelection, as were legislators. Pay raises were sprinkled throughout the budget because state agencies were having trouble keeping employees due to low pay and a hot job market.
Now, Kemp, starting a second term, is promising a conservative approach.
In August, he told state agencies he wanted them to hold the line on spending, saying they shouldn’t ask for an increase in 2023. Education and public health care were among the exceptions, and agencies that run those programs requested hundreds of millions more to deal with rising expenses and enrollment.
A few weeks before Christmas, Kemp announced the state’s 29.1 cents-a-gallon motor fuels tax — which had been suspended for most of 2022 to help consumers deal with high gasoline prices — would return Jan. 10.
The suspension cost the state — and saved drivers — $150 million to $170 million a month. Kemp said the state couldn’t afford to suspend the tax forever because the money pays for necessary road and bridge projects.
Much of the surplus will go for tax breaks, to replenish road-building efforts and into savings. Kemp hasn’t yet said how he wants to spend the rest of it. If revenue slows this year, that could mean smaller — if any — raises for tens of thousands of teachers and state employees after sizable salary bumps for many last year.
“The argument is going to be that we gave you raises last year,” Wilkerson said.
While areas with problems could see more money, such as the state’s child welfare system, many agencies are likely to see more of a return to pre-COVID-19 spending, when budgets were tight and department directors were told to make do.
Legislative leaders in the Republican General Assembly have publicly gotten on board Kemp’s approach, echoing many of his sentiments.
Senate Majority Leader Steve Gooch, R-Dahlonega, said a slowdown “means we may not have as much money to use for additional government spending. I want to make sure we keep a good rainy day fund in the bank, but we don’t want to expand the size of government either if we’re going to see a shrinkage in the economy.”
Georgia tax collections
This is how Georgia’s collections during fiscal 2022, which ended June 30, were affected in the following tax and fee categories:
- Individual income taxes: Up 28.6%
- Corporate income taxes: Up 43.4%
- Net sales taxes: Up 19.7%
- Motor fuel taxes: Down 10.1%*
- Hotel/motel fees: Up 36.1%
Through the first five months of fiscal 2023:
- Individual income taxes: Up 12.4%
- Corporate income taxes: Up 65.0%
- Net sales taxes: Up 12.4%
- Motor fuel taxes: Down 99.9%*
- Hotel/motel fees: Up 5.9%
Source: Georgia Department of Revenue
* The state suspended the gas tax late in fiscal 2022. It returns in January.