Economy, 2018 tax cut, budget trims keep lid on Kemp’s spending plan

Georgia Gov. Brian Kemp says he’s proud of the cuts he calls “common-sense savings” in his newly crafted state spending plan for next year.

The cuts come as his state economist said slow economic growth and Georgia’s flirtation with full employment are going to limit new state revenues.

Kemp said agency budget-cutting moves include giving up pricey real estate for cheaper virtual offices, using better timekeeping software for more efficient scheduling and consolidating administrative functions.

“The budget before you shows that reducing costs doesn’t require drastic cuts to other agency activities,” Kemp said, speaking to a state House-Senate budget hearing on Tuesday morning.

Kemp unveiled his $28.1 billion draft budget for 2021 in conjunction with his State of the State speech last week. That’s about $2,644 per Georgian. Adjusting old figures for inflation, it’s getting near the historic high of the roughly $2,687 spent per Georgian around the turn of the millennium. It dipped below $2,000 during the Great Recession.

Next year’s budget is still bigger than this year’s $27.5 billion plan but because of slow growth, tax cuts and other factors, it doesn’t translate to a lot of new discretionary spending.

A lot of growth in revenue gets eaten up by costs that rise with Georgia’s growing population, like Medicaid and k-12 spending. Health care and education are the two largest categories of state spending and the governor shielded those two priorities from his order last August for departments to cut 6% from their proposed 2021 spending plans. As a result, Georgia’s budget depends on revenue growing.

“We’ll have some additional revenue, but not as much additional revenue as we’re used to having” in the next nine to 12 months, said State Fiscal Economist Jeffrey Dorfman, an economics professor at the University of Georgia and one of Kemp’s top advisors.

Dorfman offered some good news: Georgia is unlikely to fall into a recession — commonly understood as six months of a shrinking economy. And he said employment is so high that it’s difficult for it to go any higher.

But that news about employment is part of what’s limiting the state budget growth, he said. People are already working about as much as they can and paying about as much income tax as they can, so that’s not going to rise much.

A cut in the top rate of state income tax from 6% to 5.75% approved in 2018 is also keeping a lid on the budget. That quarter-point is subtracting about $500 million to the budget annually.

When the state Legislature passed that tax cut, lawmakers also pledged to consider another quarter-point cut this year.  

Kemp’s proposed budget for next year, however, counts on the state’s top tax rate remaining 5.75%.  If state lawmakers give in to the temptation to deliver an election year tax cut, they’ll have to figure out where to cut, too. House Speaker David Ralston recently said he supports implementing the second phase of the tax cut, while a statewide poll found lukewarm support.

Asked what state policies could keep the state’s economy growing, Dorfman said funding education is the smartest thing policymakers can do. It can pay for itself through people earning more and paying more taxes. The second thing is infrastructure spending: ports, roads, bridges and airports.

Other than that, you tend to “steal” your growth from outside Georgia, he said. That is, getting people or companies to move here.

“I don’t believe the way you get companies to move to Georgia is by lowering the income tax rate,” Dorfman said.

He said a quarter-point doesn’t make a huge difference on tax bills. What does attract newcomers are business-friendly policies, like getting rid of red tape and speeding up permitting.

State budget hearings will continue at the state Capitol this week and soon the House is set to begin debate as lawmakers move forward with the Legislature’s take on Kemp’s budget proposal. The governor, state House and state Senate must come to some final budget agreement by the time the annual legislative session ends, which is typically in early April. After the governor signs the new spending plan, it takes effect July 1.