Save it, spend it, give it back: What will Georgia do with record surplus?

The 2022 election - featuring races for governor and every seat in the Georgia General Assembly - will likely be a factor in determining how the state uses what may be a record surplus in tax collections this fiscal year.
Convention goers cheer and boo as Governor Brian Kemp (R-GA) speaks at the Georgia GOP State Convention in Jekyll Island, Georgia on June 5th, 2021. Nathan Posner for the Atlanta-Journal-Constitution
Caption
The 2022 election - featuring races for governor and every seat in the Georgia General Assembly - will likely be a factor in determining how the state uses what may be a record surplus in tax collections this fiscal year. Convention goers cheer and boo as Governor Brian Kemp (R-GA) speaks at the Georgia GOP State Convention in Jekyll Island, Georgia on June 5th, 2021. Nathan Posner for the Atlanta-Journal-Constitution

Credit: Nathan Posner

Credit: Nathan Posner

It may seem counterintuitive, but a possibly record tax surplus that the state will run this year may prove a headache for the people who figure out what to do with it.

They know from experience that lawmakers, interest groups and political strategists will be flooding them with ideas for the extra revenue the state will take in by the time the books close on fiscal 2021 in a few weeks.

Teacher pay raises, more access to public health care, big tax cuts, sending more money to schools, and much more will be recommended at the same time Gov. Brian Kemp will be facing reelection in 2022 and trying to keep campaign promises he hasn’t yet met from his last race.

Budget writers would just as soon sock it away in savings so the state is well stocked for the next recession when it inevitably comes. But the coming election-year politics may make that difficult.

“It’s always easier when you have no money because you can just tell everybody ‘no,’ ” said former House Appropriations Chairman Ben Harbin, a Columbia County Republican who now lobbies at the Capitol. “There is absolutely going to be pressure to do something to spend it.”

The state reported last week that tax collections — which have been on the upswing since last summer following the COVID-19 pandemic economic shutdown — skyrocketed in May. Collections for May were up 68% over May 2020. The state has taken in almost $3.6 billion more this fiscal year, which ends June 30.

Those figures suggest continued strong growth in the economy since last summer as Georgia recovers from the pandemic economic slowdown, although House Appropriations Chairman Terry England, R-Auburn, said rising inflation could cool things off pretty quickly.

Right now, state coffers are flush with more than local income and sales taxes. Georgia is also receiving $4.7 billion or so from the latest federal COVID-19 relief plan. State officials are just starting the process of figuring out how to use that windfall.

The taxes the state collects help 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 that are fighting the pandemic. Besides paying salaries, it helps make sure that hundreds of thousands of former teachers, university staffers and state employees receive pensions and health care.

The General Assembly in June 2020 cut the budget by 10% because it feared tax collections would plummet. That didn’t happen, and Kemp last month signed a new state budget for fiscal 2022, which begins July 1, that backfills 60% of the cuts made to education and most state agencies, provides targeted raises and borrows more than $1 billion for construction projects.

Georgia isn’t the only state seeing rising tax collections right now. Governors across the country are trying to decide what to do with hefty surpluses and the federal relief largesse.

The federal money the state is receiving is aimed at boosting what is already a fairly strong economy. It will go for things such as one-time infrastructure projects — high-speed internet, for instance, in parts of Georgia without it. In the past, the state has used federal relief money to pay for its COVID-19 response, to boost its unemployment fund and to give teachers and state employees one-time bonuses.

The money went toward one-time expenses because the state can’t count on getting more federal funding to pay for ongoing costs in the future.

State budget writers say the same principle applies in the case of the surplus. Teacher pay raises, or tax cuts, continue to cost money every year. The surplus is a one-time infusion of money as the economy opens up following a pandemic. It doesn’t guarantee the money will be there in 2023 or 2024 to fund pay raises or tax cuts.

But in a state government that has traditionally — regardless of party — taken a fairly conservative approach to spending money, there is pent-up demand from lawmakers and advocates for different causes. The fact that Kemp and every lawmaker’s seat is up for reelection in 2022 only adds to that pressure.

Increasing the pay of Georgia’s more than 100,000 educators is politically popular and something Kemp promised to do when he initially ran for governor in 2018. Kemp said he wanted to raise teacher pay by $5,000, and he got $3,000 of that in his first year in office.

Then the pandemic hit and plans to raise teacher pay the additional $2,000 vanished. But Kemp will want to keep that promise in 2022. When he last proposed a $2,000 raise in 2020 — to meet his campaign promise — the price tag was put at about $360 million a year.

The GOP majority will likely push for another tax cut. As House Speaker David Ralston, R-Blue Ridge, is fond of saying, “Republicans cut taxes.” Republicans backed a cut in the state income tax rate in 2018 — the last time there was a gubernatorial election — and Ralston has wanted to lower the rate again.

Democrats would like to see the state expand eligibility to Medicaid, the health care program for the poor and disabled, in hopes of insuring hundreds of thousands of additional Georgians. That would eventually raise annual costs, but the federal government, which already typically pays for two-thirds of the program, is offering even more money now.

John Palmer, a Cobb County educator and spokesman for the teacher and state employee group TRAGIC, said his group wants the state to use extra money to expand access to high-speed internet. The push for broadband expansion was renewed after distance learning became far more prevalent during the pandemic.

He also said the state should fully backfill the cuts lawmakers made in 2020, provide the teacher pay raises Kemp promised and give retired state employees their first cost-of-living pension increase since the Great Recession.

“Teachers and state employees are usually the first ones asked to sacrifice when the state sees budget shortfalls, yet are often overlooked when the state sees an unexpected surplus,” Palmer said. “The state of Georgia should invest some of these surplus funds back into the agencies and schools that serve Georgia’s children and citizens.”

Caitlin Highland, communications director for the left-leaning Georgia Budget and Policy Institute, said putting the money back into state agencies that saw budget cuts in 2020 should be a priority.

“State leaders can’t waste the opportunity to right that wrong by restoring these budget cuts and funding targeted policies that put people first, like additional funding for students living in poverty ... or investments in mental health and substance abuse treatment so that our families can record and thrive,” she said.

By law, the governor sets how much money the state can spend. At least a portion of the surplus will go into the state’s “rainy day” reserve account, which is now at $2.7 billion — enough to fund a little more than a month of state government activities.

By law, the state can’t put more than 15% of the previous year’s revenue into the account, so the surplus would push the reserve to about $4 billion.

In a letter last week to colleagues, England said that reserve saved the state — and the schools and programs they fund — from having to make draconian spending cuts during the Great Recession.

“I’m not sure when it became a bad thing to save for a rainy day, but I do know from my experience during the Great Recession that our constituents were thankful we had a healthy (reserve) to fall back on and did not have to cut services more than we did,” England wrote.

The chairman, a former farm supply retailer, urged colleagues to take a cautious approach.

“While our bank account looks good today, we all have that vehicle that the transmission might go out on tomorrow and need fixing, that tooth that broke at dinner and requires an implant, and now that we are in hot weather — the AC unit that goes out, and all of a sudden that bank account looks rough again very quickly,” he wrote.

“Be patient and let things sort out, and be cautious of making promises that cost money.”

Georgia revenue

State tax collections by category through May for fiscal 2021, which ends June 30:

Individual income tax — +21.2%

Corporate income tax — +60.9%

Net sales tax — +11.6%

Motor fuels tax — - 0.5%

Tobacco tax — +7.7%

Alcohol tax — +10.7%

Hotel/motel fees — -14%

Source: Georgia Department of Revenue