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Budget Issues & Revenue Solutions: CHOICES in a Challenging Economy

Budget Issues & Revenue Solutions: CHOICES in a Challenging Economy. Alan Essig Executive Director Georgia Budget & Policy Institute April 16, 2009. Major Policy Issues Facing 2009 General Assembly. Budget Transportation

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Budget Issues & Revenue Solutions: CHOICES in a Challenging Economy

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  1. Budget Issues & Revenue Solutions: CHOICES in a Challenging Economy Alan Essig Executive Director Georgia Budget & Policy Institute April 16, 2009

  2. Major Policy Issues Facing 2009 General Assembly Budget Transportation Trauma:shot, stabbed, or burned, you want to go to Grady… if you are south of I-20, you’re prob. Going to die. The first hour of care is the diff between life or death (the Golden Hour). 100s of ppl are dying b/c of a lack of Trauma network, all agree, but we do not have one b/c we cannot come to the terms of raising fees to fund it. No one wants to raise the taxes. (ideological stubbornness). 60% that are crazy right… will tell the constituent whatever it is they want to hear. The STATE has to have money, we just get wishes, wants, and desires, but we cannot print our own money like FEDERAL. Taxes Four major big political issues, other than the budget; the other three were not dealt with. Transportation and Trauma are directly linked to the budget.

  3. Source: Center on Budget and Policy Priorities Minnesota is doing well, northern states are doing better. Tax system needs to be linked to the economic needs of the state. GA does an awful job with it, AL is worse. NC and VA is better than ours. High tech triangle is better, revenue is better linked to tax system. (Investments have paid off). GA has a choice, we can be like AL and MS, or like NC and VA… a forward looking southern state.

  4. GEORGIA’S SHORT-TERMREVENUE PROBLEM • FY 2009 Budget Deficit: $2.65 Billion (6.8% revenue decline) • First 9 months of fiscal year revenues declined 8.0%. • March decline was 14.5%. • FY 2010 Budget Deficit: $3.3 Billion (3% revenue decline) • The only states that are not dealing with a fiscal problem are the ones with their own natural resources. GA is one of the worst, but we’re not CA; FY July 1-Fec. 2? Revenue shortfall reserve, (about 8% of revenues RIGHT now… we will use 2-3 million dollars to finish the fiscal year… which may wipe out the reserve funds. 09, 8-10% less that 08, 010, 3-4% less than 09

  5. WHY IT MATTERS SHORT TERM • Already low tax-and-spend state • Majority of funds go to a few priorities Consequence – Not much fat to cut so we’re cutting vital programs!!! Myths: GA is a low tax, low spend state. We are very conservative. We don’t ask a lot, and we don’t spend a lot. We tend to be in the bottom ten. Exception: education. We fall right in the middle on edu. It is more complicated than $, we have to consider the value and quality of edu. 86%= edu. =Medicaid and PeachCare

  6. Georgia Has Always Ranked LOW 49thState Spending per Capita 43rdState & Local Own Source Revenues per Capita (taxes, fees, etc.) 43rdState Tax Revenues per Capita 41stState Revenue and State and Local Revenue as a % of Income

  7. Over 86% of Budget Spent on Education, Healthcare, Criminal Justice, and Social Services

  8. FY 2010 Budget Cuts • $400 million cut to K-12 funding formula and equalization grants. • $200 million cut to Board of Regents funding formula. • Approximately $90 million in programmatic cuts across the Department of Human Resources. • Very difficult for GA GEN Assem. To increase taxes, but they do it without realizing it. EX: cut to schools, local districts can cut own budgets, or raise local property taxes, the local systems are almost forced to raise them. EX: Cut to Board of Regents= increasing tuition. HOPE mostly helps middle and upper-class kids, therefore, the tuition increase effects low-income and poor.

  9. WHY IT MATTERS There is a structural problem in GA, we will continue to be cutting things if we do not begin to fix this. SHORT TERM • Already low tax and spend state • Majority of funds go to a few priorities Consequence – Not much fat to cut. Instead, cutting vital programs!!! LONG TERM • Already declining tax base & new low base • Regular growth of services and need Consequence – Long-term revenue problem. Cuts will continue!!!

  10. We pay about 6% of income to State taxes, it goes down during recession ’92; late 90s: sales tax off of food, cut income tax, increase standard productions (90s was boom time, small ppl making a lot of money, paying a lot of taxes). ’01: high tech bubble burst, new low, took about 5 years to get back to a point considered a low. The fear now is that we will continue to stay low. Cutting taxes without corresponding cuts to services, = billions of $ in deficit. Unless we have 10-15% revenue growth per year, we will be at a constant level of 5.5%= $1.5 Billion. DISCONNECT: ppl do not understand what their taxes go to.. We are a nation born in tax rebellion. Taxes must be paid to support our economy. PPL need to be educated.

  11. Georgia Facing Structural Deficit – Use of One Time Funds to Balance • FY 2010 balanced with almost $400 million in one-time reserve funds and over $1.35 billion in federal stimulus funds. • FY 2011 fiscal plan calls for use of $1.1 billion in federal stimulus funds. We only cut agency budgets by $1.5 bil. DEFINITION: ONE TIME=one time. Reserve funds and stimulus funds are one time revenues. If money is not earned and put into these base budgets, we will see the effects in 2012 HUGE DEFICITS!! Split it over two years… this avoiding new cuts, did not make up for the ones that have already been cut.

  12. Georgia Facing Structural Deficit – Normal Budget Growth • Need approximately $1 billion in new revenues to pay for the basic growth in government in FY 2011 and beyond. • Board of Ed & Board of Regents Growth • Medicaid and PeachCare Growth • Prisoner Growth and Aging of Prison Pop. • New Debt Service • Teacher and State Employee Salary Increases The GA budget grows naturally. We are a fast growing state. X$/student. Two things will increase in spending: 1=higher edu, 2=Medicaid and PeachCare. As ppl lose jobs, they lose health ins. And go back to school. Every 1% salary increase is $200-300 mil! The budget will increase about $1 bil/year… so if there is no productions, we will fall short, we need 5% growth just to stay even.

  13. Projected Deficits • FY 2011 = $823 million • FY 2012 = $1.9 billion See worksheets: GA Faces Large Deficits in FYs 2011 and 2012. FLAT TAX: everybody pays the same percent of taxes, supposed to be “fair.” He thinks a progressive tax is “fair.” On FED level, it is somewhat progressive, state is actually regressive.

  14. REVENUE SOLUTIONS FOR OUR REVENUE PROBLEMS SHORT-TERM: BALANCED DEFICIT REDUCTION • Targeted and prioritized budget cuts • Strategic use of RSR • Federal assistance • Revenue enhancements We can no longer live in “fantasy world”. The fed govt has been able to b/c they can decrease taxes and just print more money. They have been making the easy decisions, give ppl more money and more services. The state cannot do this! Our decisions need to be made based on the facts. We are facing bill of dollars of deficits. We will have to either raise revenue or cut services… we need to fully think about what those implications are. 2/3 cuts; 1/3 increase.

  15. SHORT-TERM:Revenue Enhancements Economic Argument – “Basic economic theory suggests that direct spending reductions will generate more adverse consequences for the economy in the short run than either a tax increase or a transfer program reduction.” -Joseph Stiglitz and Peter Orszag Historical Argument – In response to recessions in the 1980s, 1990s, and 2000s, a majority of states raised revenues. (Source: NASBO) Practical (and perhaps Moral) Argument – “The only solution, if we want to preserve the priorities of classroom instruction, healthcare and public safety, is to raise new revenue.” - Governor Steve Beshear, Kentucky

  16. SHORT TERM:Revenue Enhancements Options Increase Cigarette Tax by $1 pack = $442 million (House Bill 39) Other states – Kentucky governor signed a bill to double the cigarette tax on Feb. 13. Mississippi, Kentucky, Virginia, South Carolina, Florida and Kansas currently considering cigarette tax proposals. Lower cap or implement income ceiling on various tax credits and exemptions. Other states – Connecticut, California, New Jersey, Oregon, and Kansas have either scaled back tax breaks or are considering proposals to do so. GA ppl support increase in cig. Tax. Teenagers are extremely price sensitive in regards to starting smoking. The higher $ of cig, the less likely it is that teens would start, which would decrease health care costs in 20-30 yrs.

  17. Misguided Tax Policy • HB 261 • Temporary 1.2% tax credit for purchase of home ($1,800 maximum credit). • Cost to State – Approximately $85 million • $75,000 per additional home sold • HB 481 • Temporary $2,400 tax credit to hire unemployed worker. • Cost to State $850 million. • $265,000 per additional job created. • Decrease Capital Gains Tax by 50% ($400 million cost) • 99% of benefit goes to top 20% income. 77% of benefit goes to top 1% of income STATE economist projected that both bills will have a marginal impact on the economy, 261 will have additional cuts of $50 mil in 010. 481 will cost state $400 mil. 2012 will add 1.2 bil to deficit

  18. REVENUE SOLUTIONS FOR OUR REVENUE PROBLEMS LONG TERM: COMPREHENSIVE TAX REFORM Solidify tax base to assure adequacy Improve fairness of tax system Modernize tax base for a 21st century economy Increase accountability SR 453

  19. LONG TERM:Tax Transparency and Accountability Tax Expenditure Report – Treat tax expenditures as we treat budget expenditures. • Highlight all tax breaks currently in law(sales, income, property). • Estimate lost revenue. • Perform cost-benefit analysis. • 39 states do this, but Georgia does not! SB 206

  20. REVENUE SOLUTIONS Budget policy and tax policy must be linked. You get what you pay for!!! We need to be practical in our thinking. What to fund, how much, when. What do we fix/not fix. Everything costs money. It is a huge problem that everyone is afraid to discuss. Gov. is really good fiscal steward of the State. Policy Priority effects change. We need to judge things by outcomes, continue with the things that work, and get rid of the things that do not. (Republicans are good at this). The efficiency argument: any $35 bil org. private sector vs state, stacks up. ReDirect 5% cuts, 3% adds (Theory) it turned into taking all cuts and giving almost no adds. State agencies should focus on being as efficient as possible.

  21. Contact Info Sign up for email updates at www.gbpi.org Alan Essig 100 Edgewood Ave Suite 950 Atlanta, GA 30303 404.420.1324 sbgehl@gbpi.org

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