Gov.-elect Kemp views strong state tax revenues as he ponders first budget proposal

By David Pendered

Incoming Gov. Brian Kemp has the benefit of delivering his first budget proposal to the Legislature as the state economy continues to expand and spin off an increasing amount of tax revenues, according to an economic outlook contained in a new policy brief by Georgia’s state economist.

Norfolk Southern at inman yard

In a sign of a healthy economy, Norfolk Southern reported a 20 percent increase in its shipments of containers that can be transported by ship, train and truck, such as these rail cars at Atlanta’s Inman Yard. The increase was recorded in the first nine months of 2018, compared to the same period in 2017, according to the company’s third-quarter filing with the U.S. Securities and Exchange Commission. Credit: David Pendered

The report bodes well for Kemp. As governor, the Kemp administration will set the revenue forecast that state lawmakers must use to finalize a budget. While lawmakers can adjust the spending recommendations in the governor’s proposed budget, they cannot spend more than the sum set by the governor.

Kemp campaigned on a promise to cap state spending, according to his campaign website. But he also promised to fund programs, including education:

  • “As governor, I will build on [Gov.] Nathan Deal’s legacy and fully fund public school education.”

The fairly rosy economic forecast issued Tuesday by state economist Ken Heaghney matches that of a snapshot of recent economic activity issued the Tuesday by the Federal Reserve Bank of Atlanta. The Atlanta Fed issued its unofficial, but real-time, estimate of four-quarter, 2018, growth rate of the real gross domestic product in a report called GDPNow.

GDPNow showed the economy in fourth quarter was stronger than previously estimated. The quarter’s growth is now thought to be 2.8 percent, up from the 2.6 percent the Atlanta Fed estimated on Jan. 3. The uptick stems from the labor report issued Jan. 4 by the U.S. Bureau of Labor Statistics.

Kemp likely will be viewing a revenue forecast that far exceeds the one Deal used to set the spending limit for the state budget that took effect in the fiscal year that started July 1, 2018.

This situation is provided in a policy brief issued by Heaghney, Economic Landscape for the 2019 Legislative Session. Heaghney was appointed state economist in 2005 by then Gov. Sonny Perdue and also directs the Fiscal Research Center, at Georgia State University.

Just for starters, Heaghney reports that Georgia’s total tax revenues have grown by nearly three times the estimate of general fund revenues that was used to build the state budget for the fiscal year that started July 1, 2018.

House Bill 918

The tax reform measure, House Bill 918, is slated to cause state revenues to decline in coming years. Credit: ‘Economic Landscape for the 2019 Legislative Session’

Heaghney reports that total tax revenue growth in Georgia reached 6.8 percent during the first five months of the fiscal year that began July 1, 2018. That rate is compared to the same period in the previous fiscal year.

State budget writers used a forecast growth rate of 2.3 percent to build the FY 2019 budget, Heaghney wrote.

Heaghney cites three scenarios that could impact state tax revenues in the future:

“Federal fiscal policy has boosted U.S. and Georgia economic growth”

  • As a result of the federal Tax Cut and Jobs Act, signed by President Trump in December 2017, the nation’s GDP grew by rates that far exceeded those of the Great Recession. However, the impact is expected to dwindle in late 2019 and 2020, and – so far – “TCJA has not yet had a notable impact on labor force participation nor on business investment,” Heaghley reports.

Interest rates are rising and could weigh on future growth

  • Housing and vehicle sales have slowed in recent months as the Federal Reserve has raised interest rates in hopes of preventing the economy from overheating – just two examples of a softening attributed to the Fed’s rate hikes. In addition, interest rates face upward pressure because of borrowing by the federal government to cover its deficits.
  • Of note, wsj.com reported Wednesday that minutes of the Federal Reserves December meeting indicate officials think they may be close to ending the recent series of rate hikes because: “’[T]he extent and timing of further policy firming less clear than earlier,’ the minutes said.”

“Georgia’s tax reform implementation is in process and will enhance revenues initially but significantly cut taxes in the medium term”

  • State revenues are expected to decline in the fiscal year that begins July 1, 2020 because of provisions in the tax reform strategy embodied in House Bill 961:
  • “[T]he new tax structure is expected to result in significant revenue decreases compared to the previous tax structure. … [Budget] writers will need to bear in mind the expected negative impact on revenue growth from the final phase of tax reform in FY 2021 in order to maintain appropriate budget flexibility.”

 

David Pendered, Managing Editor, is an Atlanta journalist with more than 30 years experience reporting on the region’s urban affairs, from Atlanta City Hall to the state Capitol. Since 2008, he has written for print and digital publications, and advised on media and governmental affairs. Previously, he spent more than 26 years with The Atlanta Journal-Constitution and won awards for his coverage of schools and urban development. David graduated from North Carolina State University and was a Western Knight Center Fellow. David was born in Pennsylvania, grew up in North Carolina and is married to a fifth-generation Atlantan.

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