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Governor Concedes Supply-Side Tax Cuts Are Not Workable, But Still Insists He Likes Them

Georgia's Governor Sonny Perdue ended a month of speculation this week when he decided to veto a capital gains tax cut -- but seemed to equivocate on the outrageous claim that capital gains tax cuts can actually result in increased revenue.

As reported here, the Georgia legislature in early April passed a budget for fiscal year 2010 that included a major tax cut for the wealthy (an exclusion for long-term capital gains income). The proposal was roundly criticized by opinion leaders in the state, including the Atlanta Journal Constitution and the Macon Telegraph, because the vast majority of the benefits would go to the richest state residents and because of its potential revenue impact during a state budget crisis.

Uncertainty surrounded the outcome because it was unclear what Governor Perdue, a proponent of "supply-side" tax cuts, would decide. Supply-side economics is a school of thought associated with conservative politicians (but not many mainstream economists) that tax cuts for investment or for those who invest can yield huge increases in economic growth. Most incredibly of all, this resulting economic growth is often argued to result in so much new tax revenue that the tax cut can be cost-free or can even lead to increased revenues. Proponents of this idea believe that cuts in the capital gains tax are especially likely to lead to increased revenues.

On Monday, the Governor issued a veto statement saying that, "While some argue these tax reductions will ultimately generate more revenue, the constitutional restraint of a balanced budget prevents policymakers the luxury of time to allow that growth to overcome the short-term loss of revenue." In other words, the Governor seemed to imply that cutting taxes on capital gains income could actually result in increased revenue, but the increased revenue simply would not come soon enough to meet the requirement that the state budget be balanced each year. To make clear that he was not opposed to such tax cuts in principle he added, "Should the General Assembly choose to enact a budget next session that incorporates the estimated revenue reductions caused by large tax cuts, I would entertain such cuts at that time."

The Governor should be thanked for vetoing a regressive and irresponsible tax cut in the middle of a budget crisis, but he should be called to task for entertaining the absurd idea that tax cuts (of any sort) can actually lead to increased revenues.

Middle-income Georgians are still waiting for their Governor to decide whether to increase their property taxes and use the revenue to slash capital gains taxes for the rich. Legislation making both of these changes (HB 481 and HB 261) continues to sit on Governor Sonny Perdue's's desk even as it's roundly criticized by opinion leaders, including the Atlanta Journal Constitution and the Macon Telegraph.

The editorial boards of both papers cite ITEP's recent report on the legislation. The analysis describes the impact across income groups of eliminating a property tax relief program in combination with cutting taxes on capital gains income. The Atlanta Journal Constitution points out, "So who will see a boon from a capital gains tax break? A very wealthy few. People in the top 10 percent of the income spectrum own about 70 percent of taxable stocks. In its analysis of the capital gains tax break, the Washington-based Institute on Taxation and Economic Policy concluded that 77 percent of the tax cut would go to the very richest 1 percent of Georgians."

Sadly, bad news for the Georgia economy may be what it takes to convince the Governor that tax cuts for the rich, even if they are partially offset by tax increases on somebody else, are simply unaffordable. As Charles Richardson at the Macon Telegraph writes, "There is more bad news on the economic front. On May 7, the governor should get the revenue report for April. It is not expected to be good. March's numbers were down 14 percent. However, that dark cloud may hold a silver lining. The dismal income report may spur Gov. Perdue to veto HB 481 and HB 261. That would be fiscally prudent, and move the state closer to fiscal responsibility and away from ideological, get-out-the-vote rhetoric that is leading us to disaster."

A new report from the Georgia Budget and Policy Institute highlights the shocking decision on the part of Georgia legislators to actually cut taxes in the face of an immense budget deficit. According to the report's analysis of official state fiscal notes, if the Governor signs all tax bills passed by the legislature, state revenues will fall by $116 million in fiscal 2010, and by over $1.2 billion in fiscal 2012.

The bill with the biggest cost includes a pricey and regressive exclusion for 50% of all long-term capital gains income, analyzed by ITEP earlier this month. In addition, a $1,800 tax credit for home buyers, as well as a dozen other tax cuts would dig the state deeper into debt if approved by the Governor.

The Center on Budget and Policy Priorities recently released a very useful report summarizing tax expenditure reporting practices in the states, as well as methods for improving a typical state's tax expenditure report. For those unfamiliar with the term, a "tax expenditure" is essentially a special tax break designed to encourage a particular activity or reward a particular group of taxpayers. Although tax expenditures can in some cases be an effective means of accomplishing worthwhile goals, they are also frequently enacted only to satisfy a particular political constituency, or to allow policymakers to "take action" on an issue while simultaneously being able to reap the political benefits associated with cutting taxes.

Tax expenditure reports are the primary means by which states (and the federal government) keep track of these provisions. Unfortunately, most if not all of these reports are plagued by a variety of inadequacies, such as failing to consider entire groups of tax expenditures, or not providing frequent and accurate revenue estimates for these often costly provisions. Shockingly, the CBPP found that nine states publish no tax expenditure report at all. Those nine states Alabama, Alaska, Georgia, Indiana, Nevada, New Jersey, New Mexico, South Dakota, and Wyoming, undoubtedly have the most work to do on this issue. All states, however, have substantial room for improvement in their tax expenditure reporting practices.

For a brief overview of tax expenditure reports and the tax expenditure concept more generally, check out this ITEP Policy Brief.

Last Friday, the Georgia General Assembly passed a budget for fiscal year 2010 that includes a major tax cut for the wealthy (an exclusion for long-term capital gains income) and a substantial tax increase for the middle-class (eliminating a state-funded property tax relief program). A new report from ITEP concludes that if this proposal was fully implemented in 2008, the poorest 95 percent of Georgia taxpayers would pay, on average, higher state taxes than they do now.

The proposed capital gains tax break would allow investors to exclude 50 percent of their long term capital gains income from the state income tax when fully implemented in 2012. If the capital gains tax cut had been fully implemented in tax year 2008, Georgia residents would have seen a total tax cut of about $340 million, and the very richest 1 percent would receive an incredible 77 percent of that. (For more on flaws of capital gains tax breaks at the state level, see ITEP's report A Capital Idea.)

The property tax increase used to offset the costs would eliminate the Homeowner Tax Relief Grant (HTRG). Through the grant, the state of Georgia currently pays most property taxes on the first $8,000 of a Georgia homestead's assessed value. Since Georgia homes are assessed for tax purposes at 40 percent of their market value, this is equivalent to exempting $20,000 of a home's market value from property taxes.

While there are certainly flaws with any homestead exemption, there are plenty of alternatives for making property tax relief fairer. For example, a property tax circuit breaker can ensure that, for homeowners and renters earning below certain income levels, property taxes do not exceed a certain share of a family's income. (For more on the benefits of property tax circuit breakers, see ITEP's policy brief.)

The repeal of the Homeowner Tax Relief Grant should, in theory, have given lawmakers an important opportunity to rethink its approach to property tax relief. But the budget plan squanders most of the tax savings from HTRG repeal on a poorly-conceived long-term capital gains tax cut for a small number of the wealthiest Georgians. Governor Sonny Perdue should know that approving these changes would amount to a blatant shifting of state taxes from the rich to the middle-class.

This week Columbus, Georgia won an important victory against Expedia.com (an online travel service) in Columbus Superior Court.

First some background: Expedia can keep their prices so low because they negotiate with local hotels to pay discounted/wholesale rates for the rooms, and then they charge customers for the actual cost of the room. The tax charged by Expedia and paid by customers is on the room's actual cost. Here's the kicker: Expedia pockets the difference in tax between the wholesale cost and the room's actual cost.

This obviously leaves localities that levy lodging taxes like Columbus, Atlanta, and San Antonio out in the cold because they aren't collecting needed revenue on the actual cost of hotel stay, but the wholesaler's price. Not to mention the ethical implications of telling customers you are collecting a tax, but then pocketing a portion of it to line company's pockets. Expedia isn't the only travel site spending time in court. A lawsuit before the Georgia Supreme Court targets Orbitz, Travelocity, and fourteen other online travel sites.

This week the Georgia Budget and Policy Institute (GBPI) issued a report, Deficit Reduction Step Two: Bringing Other Voices Into the Planning Process which calls for a special legislative session to deal with a projected $1.6 billion deficit, and details a sensible approach for addressing the state's budget situation.

According to the GBPI report, "The state has suspended or eliminated the hiring of new and replacement positions, all out-of-state and non-essential travel, all purchases of motor vehicles, and the purchase of supplies, materials, equipment, and printing." But cutting government services isn't the only option available to cure the state's budget woes. Policymakers should hold a special session to consider the revenue-raising options that this report discusses, like a temporary income tax increase, eliminating special tax breaks, increasing the cigarette tax and reinstating the estate tax.

With summer in full swing and state fiscal years largely underway, most state legislators probably think that they're done with the heavy lifting, at least policy-wise, for the year. Yet, due to the poor condition of the nation's economy, tax revenue in a number of states is falling well short of expectations, reopening budget gaps that policymakers thought they had closed. For instance, the Georgia Budget and Policy Institute this week issued a report that estimates that the deficit for the current fiscal year (FY09) could reach as much as $2 billion, due to weak sales and personal income tax collections. The report calls for legislators to return in September to address the shortfall. As the Atlanta Journal Constitution reports, Senate Appropriations Chairman Jack Hill has already indicated that a variety of options for resolving any potential deficit will be considered, including undoing recent tax cuts.

In New York, where the fiscal year begins in April, the problem may be more prospective than retrospective, but that didn't stop Governor David Paterson from calling this week for a special legislative session to address the Empire State's burgeoning budget deficit. According to the latest analysis from the state's budget office, the expected budget gap for FY 2010 has risen from $5 billion to $6.4 billion in the span of three months, with a three-year deficit now exceeding $26 billion. With his request for legislative action, particularly with the entire Legislature up for election this November, the Governor would appear to be a paragon of fiscal responsibility, except that he is simultaneously demanding a property tax cap that would make matters worse. For more on alternatives to the Governor's property tax plan and on the state's fiscal condition generally, visit the Fiscal Policy Institute's web site.

As we mentioned last week, this is the season for fiscally irresponsible sales tax holidays to purportedly give relief to working people on their back-to-school shopping. Sales tax holidays are a bad idea for the states' budgets and tax-payers alike. Low-income families probably cannot time their purchases to take advantage of a sales tax holiday, and it can be an administrative headache for retailers and government. Sales tax holidays are also poorly targeted to low-income individuals compared to other policy solutions such as low-income tax credits.

Now another group of states is ready to forgo needed tax revenue in exchange for a few dollars off the purchase price of various goods. These states include Alabama, Iowa, Missouri, North Carolina, Tennessee, and Virginia among others with holidays scheduled Friday through Sunday.

Meanwhile, a Birmingham News editorial points out that the sales tax holiday is a "gimmick" that has allowed state lawmakers to divert attention from their outrageously regressive tax code. Alabama is one of only two states that doesn't exempt or provide a low-income credit for its sales tax on groceries. If that were done, Alabama consumers would save far more money than they do on a three-day sales tax holiday (an average family of four would save about seven times as much). But instead of exempting groceries from sales taxes or raising the state's second-lowest in the nation income tax threshold, lawmakers pretend to help low-income Alabamians with a few tax-free shopping days a year.

Georgia's sales tax holiday began on Thursday and exempts articles of clothing costing less than $100, personal computers cheaper than $1500, and school supplies under $20. This week, the Atlanta Journal-Constitution mentioned some of the more amusing exemptions covered by that state's sales tax holiday. These exemptions include corsets, bow ties and bowling shoes. As the author noted, guys headed to their first day back in school "might combine the bow ties and bowling shoes, then just head straight for the restroom to collect their free swirlie." The article also mentions ski suits, highly unlikely to be big sellers in Georgia, and adult diapers, seemingly unrelated to the average family's back-to-school needs. Georgia lawmakers may want to revise their list of exemptions to concentrate on discounting necessities, or better yet, end this farce once and for all.

Conservative commentators frequently depict Hollywood as ridden with leftists, but the reality is that, when it comes to tax policy, the movie industry is no different from any other. Take recent legislative activity in Michigan and Georgia, for example. Michigan Governor Jennifer Granholm is on the verge of signing a bill that would, among other things, provide a refundable tax credit equal to 42 percent... 42 percent!... of a film production's costs. The Georgia Senate has adopted a measure - also expected to be signed into law - that will more than double that state's current film production credit.

Yet, as an important new report from the Massachusetts Department of Revenue (DoR) documents, states may receive precious little in return for these enormous investments. According to the report, Massachusetts will lose upwards of $140 million between 2006 and 2008 due to its film tax credit, but may receive only about $20 million in new revenue from the economic activity associated with the credit. What's more, as the report notes, "any estimate of the net economic and tax revenue impact of tax incentives needs to take into account the reduction in state government spending" associated with such credits. In such tight budgetary times, that "reduction in government spending" is sure to occur if policymakers keep trying to lure the latest blockbuster to their state.

We told you last week the Georgia House was all in a flutter over property tax cuts including caps and repeal of the state's car tax. With only a handful of working days left on the legislative calendar, Senate Republican leaders this week pushed through a tax cut package of their own which includes a 10 percent cut in income tax rates over five years. Estimates are that eventually the state would lose more than $1.2 billion a year. Despite mountains of evidence that tax cuts don't pay for themselves or stimulate the economy (one need only look at the fiscal situation on the federal level to understand this) Senators are billing the income tax changes as a "stimulus plan." The Georgia Budget and Policy Center has a new analysis showing the damaging impact this cut would have on the state.

This week in the Georgia House, lawmakers voted overwhelmingly (166-5) to approve property tax cuts, including the elimination of the state's car tax, that will cost the state more than $750 million when fully phased in. Republican Speaker Pro Tem Mark Burkhalter doesn't seem concerned with offsetting the lost revenue. Responding to concerns about the plan's price tag, he says, "It's very simple. You cut taxes, the economy grows. The economy grows, Georgians prosper. The best way to stem off any recession is to cut taxes. Not to clam up, go home and wait for the storm to pass." We've learned on the federal level that tax cuts simply don't pay for themselves, but clearly legislators in Georgia want to try their own experiment with this flawed (and dangerous) economic myth. The House-passed bill contains another misguided property tax change... a 2% cap on annual increases in a home's value for tax purposes (the cap would be 3% for businesses).

The Georgia Budget and Policy Institute issued a report adding up the costs of the state House's handiwork related to taxes this year and found that the tax bills passed this session would cost as much as $113 million in FY 2009, $473 million in FY 2010, and $798 million in FY 2011.

Coincidentally, the Oklahoma Senate passed a proposed constitutional amendment last week also dealing with caps on increases in a home's taxable value. In this case, the cap would be decreased from 5% to 3% (the 5% cap would remain intact for businesses). Assessment value caps of this sort have recently received much attention in Florida. The unfair way in which these caps provide the greatest relief to long-time residents (creating vastly different property tax bills between neighbors with similar houses) recently drove Florida residents to amend their constitution to patch over the problem in a very imperfect way.

Rounding out the recent trend in debating poorly reasoned property tax cuts is Arizona, where the House narrowly approved a measure to permanently repeal a portion of the property tax that is currently suspended. Allowing the tax to take effect again would raise about $250 million annually for the state, significantly reducing the projected $1.2 billion revenue shortfall for the current fiscal year. If the plan passes, cuts in public services could be the result.

Georgia taxpayers dodged a substantial bullet this week. We've been following for months now Georgia's GREAT Plan and its various modifications. Originally the "Georgia Repeal of Every Ad Valorem Tax" would have repealed virtually all Georgia property taxes and replaced the lost revenues by expanding the state's sales tax base. The tax fairness and budget implications of such a regressive and costly plan did not sit well with many observers and lawmakers.

The bill's main proponent, House Speaker Glenn Richardson, eventually gave up the fight for the original bill. The bill then morphed into a cluster of property tax proposals including the freezing of assessed property values and capping local property tax revenues. (For more on the specific provisions take a look at the Georgia Budget and Policy Institute's fact sheet here). Recently, GBPI's Director Alan Essig had an editorial in the Atlanta Journal Constitution titled, "Have Responsible, Not Reckless, Tax Reform."

It seems that more than a few lawmakers agreed with Essig.In a victory for tax justice advocates, the newer version of the GREAT Plan was defeated in the Georgia House this week by a vote of 110 to 62, ten votes short of the 120 needed to pass.

For many tax justice advocates, Georgia has been a state to watch. House Speaker Glenn Richardson's "Georgia Repeal of Every Ad Valorem Tax" (GREAT) Plan, which would have repealed the state's property tax and replace the lost revenues by expanding the state's sales tax base, appeared to be doomed to fail this legislative session. The Plan faced numerous political road blocks and would have caused an $8.6 billion budget hole for the state according to Georgia State University's Fiscal Research Center. Yet there were many remaining questions regarding how much political capital the Speaker was willing to invest to make his plan a reality. Seeing the writing on the wall, the Speaker is now moving full speed ahead with a Plan-B.

His new proposal would eliminate just the state portion of the property tax in favor of an expanded sales tax base. The legislation also includes a troubling property assessment cap. (Residential assessed values will only be allowed to increase by 2 percent annually.)

A new report from the Georgia Budget and Policy Institute (GBPI) explains the problems with the legislation, which would create a budget shortfall of $827 million and increase the regressivity of the state's tax structure. In an Atlanta Journal-Constitution op-ed, GBPI executive director Alan Essig writes, "Low- to middle-income Georgians already pay a higher percentage of their income in state and local taxes. Swapping property taxes for more sales taxes will only make it worse." He goes on to plead for a reasoned approach to property tax reform while simultaneously making the case for investment in public services. "The speaker's proposals won't keep Georgia moving forward. In fact, his risky ideas for reform would set the state back for generations. What we need is a reasoned plan for reform that adds up and provides adequate revenue while putting in place a fair tax system for all Georgians." We couldn't agree more.

Many states are in a fiscal crunch and the number of states facing budget shortfalls may be growing. This week the Center on Budget and Policy Priorities released a state fiscal update saying that, "At least twenty-five states, including several of the nation's largest, face budget shortfalls in fiscal year 2009." A sluggish economy, bursting housing bubble, and the decline of tax revenues have all had a significant impact on states and their ability to keep budgets balanced.

It's not always clear that states can act as effectively as the federal government to kick start a sluggish economy, but that doesn't stop them from trying. For any legislation to be effective as a stimulus to counteract a recession, it must be "temporary, timely and targeted," as argued by the Center on Budget and Policy Priorities. Some of the stimulus initiatives being proposed on the state level meet these goals better than others. Tax cuts that are not temporary can do more harm to states in the long-run, and provisions that will not have any benefit until after a recession has passed are useless as a stimulus. Most importantly, those tax cuts not targeted towards low- and middle-income people are not likely to result in new spending that immediately spurs the economy, but will go largely towards savings, which takes much longer to have a positive effect.

Stimulus Plans in the States: Connecticut, Iowa, Georgia, and Ohio

In Connecticut, Governor Jodi Rell has asked legislators to reconsider their economic stimulus proposals, arguing that there is no money available to pay for tax cuts. Senate Democrats there proposed increasing the state's property tax credit by $250 and House Republicans proposed offering tax credits to offset medical and energy costs. It's certainly not obvious that an increased property tax credit is well-targeted, since property-owners tend to have higher incomes than everyone else. Depending on how it's implemented, it may not be timely either.

Policymakers in Georgia have proposed legislation to expand the state's personal exemptions temporarily. The legislation is targeted to the degree that it benefits middle-income people, but it doesn't reach those too poor to pay state income taxes. It's also flawed because it's not entirely timely. A lot of people won't benefit until next year.

Some Iowa lawmakers have adopted a completely different approach to providing economic stimulus by proposing a five-year property tax break for Iowans who improve their homes. According to one state senator, the tax break "really rewards all homeowners that have pursued the American dream of owning their own home." But a five-year tax break does not qualify as temporary, at least for the purpose of responding to a recession. It's also hard to believe that it would be targeted to those who need help and will spend the extra money right away, and it's not clear that any home improvements that result will happen quickly enough to qualify this as timely. Another idea being tossed around is a proposal that would expand the state's sales tax holiday to include all items subject to the sales tax. ITEP has long argued that sales tax holidays are not good policy. In this context it's worth noting that they are usually not targeted well at all, since the benefits go to everyone who shops during the sales tax holiday and because people who need help the most are less capable of shifting the timing of their consumption to take advantage of it.

Ohio Governor Ted Strickland isn't proposing increased tax credits. Instead, his plan includes borrowing $1.7 billion in an attempt to stimulate the state's economy and create 80,000 jobs. If approved by voters, more money would be available for transportation, renewable energy technologies, and local infrastructure projects. Borrowing to fund important investments makes sense in some contexts, but as a stimulus it's unclear whether these investments will give a timely boost to the economy to counteract a recession that is occurring now.