Good Times in Georgia Spur Tax-Cut Push as History's Lesson Lost

  • One measure would trigger more cuts when savings swell
  • `You should be building reserves in good times,' analyst says

Times are good in Georgia after four years of growing revenue. So lawmakers there are preparing to cut income taxes to one of the lowest levels in the southeast, joining states determined to reduce rates instead of letting the cash build up.

Republicans, who control both houses of the legislature and the governor’s mansion, back the cuts as a way to give Georgia an edge as it competes with neighboring states to lure businesses. To critics, it will impair the state’s financial flexibility the next time the economy stumbles and put its AAA bond rating in peril.

“There is a general feeling that we are back in good times, that the economy is strong, that the state is bringing in more than it should,” said Wesley Tharpe, an analyst with the Georgia Budget and Policy Institute, which opposes lawmakers’ plans.

Almost seven years after the end of the recession, the budget shortfalls that once gripped the nation’s capitals are receding in memory, spurring a tax-trimming push in the south this year that’s meeting with mixed success. In Florida, Governor Rick Scott sought to shave $1 billion off residents’ bills, though it was dialed back by the legislature to about $129 million, while Tennessee lawmakers tried and failed to make stock dividends exempt. Mississippi legislators want to lower income taxes and do away with one businesses pay to set up shop.

State tax collections have been climbing since 2010 and have outstripped the previous peak, according to the Nelson A. Rockefeller Institute of Government in Albany, New York. Richard Ciccarone, the chief executive officer of Merritt Research Services, which analyzes municipal credit risks, said they should be socking the money away.

Lawmakers don’t have to look far for a cautionary tale: Louisiana, which slashed taxes before the full brunt of the recession, is wrestling with shortfalls again this year as its oil-fueled economy sputters.

“Things should be working in reverse,” Ciccarone said. “You should be building reserves in good times and reducing taxes in bad times.”

Georgia’s bond yields, like those of other states, are rising relative to top-rated securities, a sign that buyers perceive more risk. Its debt yields 2.04 percent, about 0.20 percentage point more than the benchmark, the widest gap since the data begin in 2013. As recently as December Georgia bonds yielded less than AAA debt.

Georgia lawmakers are seeking to finalize the measures before the legislative session ends as soon as this week. One bill that has already passed the Senate would implement a flat income tax of 5.4 percent, instead of the tiered rates that currently reach 6 percent. It would cost $286 million in revenue annually by 2020, according to the state’s estimate.

Constitutional Amendment

A second proposal would put a constitutional amendment on the ballot to limit “the expenditure of excess revenue and budget surpluses by lowering personal income tax rates.” It mandates 0.1 percentage point decreases in 2018 and 2020 if the previous year’s revenues and rainy-day funds hit certain benchmarks.

Backers say the reductions will help the business climate in Georgia, and modernize an income-tax rate set in 1937.

The proposals are a fraction of what was recommended by a tax-reform committee nearly six years ago and will bring the state in line with North Carolina, which reduced its taxes in 2013, said Kelly McCutchen, president and CEO of the Georgia Public Policy Foundation, a non-profit that advocates a smaller role for government.

“When companies are making decisions on where to go, particularly in the southeast, there are little things on the margin like this that they are going to look at,” he said.

When other other states have mandated tax reductions by formula or caps, they’ve left a fatal flaw, said Ciccarone, the municipal credit analyst: They didn’t include a counter mechanism to raise taxes if revenues tumbles.

“It’s a one-way street,” he said. “You have to be very careful.”

Georgia is one of just eight states with a top general-obligation bond rating from both Moody’s Investors Service and Standard & Poor’s, according to data compiled by Bloomberg. Officials from Moody’s, S&P and Fitch Ratings declined to comment on the pending legislation. Moody’s, however, weighed in the last time the state enshrined tax policy in its state constitution in 2014, when it capped the income-tax rate.

“A significant strength of state management lies in its broad powers and resources to manage its finances in the face of volatility,” the report said. “Georgia’s constitutional cap has stripped the state of that option with respect to its personal income tax.”

(An earlier version of this story misidentified Tharpe’s title.)

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