January 18, 2014

David Pennington: The real State of the State: Cloudy with a chance of rain

Nathan Deal’s annual State of the State address had many feeling confident that, at long last, our economy has emerged from behind the clouds. Deal painted a sunny picture of revenue growth without tax increases, more Georgians working, and more money spent on education; but a comprehensive analysis of Georgia’s revenue streams reveals a different reality.

Over the last year, Georgia’s economic fundamentals have not significantly improved. In fact, most of our revenue increases came from one-time events and a new tax that the governor failed to mention, not sound state actions or a strengthening economy. With individual income taxes and sales and use taxes comprising 80 percent of Georgia’s revenue, analyzing the root cause of changes in these categories is key to evaluating Georgia’s economic health.

Federal income tax rates increased in January 2013 as the Bush tax cuts expired, so many taxpayers with the ability to shift income from future years into 2012 did so. Wealthier individuals sold stocks to reduce capital gains taxes, and companies shifted bonuses and dividend payments from 2013 into 2012.

The result was a jump in income tax revenue at both federal and state levels. Georgia individual income tax collections surged 26.1 percent in April 2013 to more than $1 billion. Payments accompanying state tax returns for the last six months of fiscal year (FY) 2013 equaled $320 million versus $65 million in FY 2012.

Additionally, a new method of taxing vehicles in Georgia took effect in March 2013. Marketed as a “good deal” by eliminating the birthday tax, the title ad valorem tax (TAVT) is a heavier burden on Georgians. Private vehicle sales (with limited exceptions) are now subject to the TAVT, whereas before they were exempt from sales tax.

Nathan Deal’s new vehicle tax increased tax revenue by a net $204 million in the first six months of FY 2014 — 46 percent of the total revenue increase. Once this new tax cycles through its first year, it will no longer boost revenue collections to the same extent.

The TAVT rate, which began at 6.5 percent in March, has already increased to 6.75 percent and will go to 7 percent next January. Subsequently, an unelected commissioner has been given authority to increase it to 9 percent. While this tax has had a large one-time impact, new taxes do nothing to strengthen Georgia’s economic fundamentals.

Due to a reduction in refunds, corporate income tax collections join the new vehicle tax as a major component of Georgia’s revenue increase. Business losses carried forward from the recession are no longer reducing tax liability to the same extent. This revenue boost is not sustainable and will eventually settle down to match corporate profit growth.

A revenue summary for the first half of FY 2014 casts a cloud over the sunny picture painted by Nathan Deal. Total revenues increased 5.1 percent year over year. The new vehicle tax and corporate income tax comprise only 10 percent of total revenues, but are 67 percent of revenue increases. In the second quarter, they comprise 92 percent of the increase. Individual income tax and sales and use tax comprise 80 percent of Georgia’s revenue stream. But individual income tax collections rose a weak 2.7 percent, while sales and use tax was flat.

Deal estimates revenue increases of $832 million for FY 2014, but this data analysis suggests we will struggle to hit $600 million. With one-time events driving most of the revenue increases in the last 12 months, we can better understand our distressing national rankings — fourth highest long-term unemployment rate; fifth highest poverty rate; one in five Georgians requiring food stamp assistance; a rapidly growing Medicaid population.

The need for real comprehensive tax reform is clear. Nathan Deal has chosen incremental change over bold policy change. It’s clearly not working.

David Pennington is the mayor of Dalton.

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