Needed: a critical look at Georgia’s tax structure

March 1st, 1999 by Leave a Comment

The following article is reprinted with permission from the March 1999 edition of Georgia County Government Magazine, published by the Association County Commissioners of Georgia, the 85-year-old education, training and legislative advocacy organization of all 159 Georgia county governments. ACCG may be reached on the Web or by writing 50 Hurt Plaza, Suite 1000, Atlanta, Georgia 30303.


In his first budget message over eight years ago, Governor Miller quoted from the old country song, warning us that we could not continue “drinking that new bubble up and eating that rainbow stew.”

From that admonition, he carried forward on his plan to reduce state agency spending and therefore the size of state government. Even with his 5% annual redirections and the resulting reductions impacting individual departments and programs, over the past eight years the state budget has grown from $7.78 trillion to $12.5 trillion — a 61% increase.

Most of the growth can be attributed to spending lottery funds on education programs and teacher pay raises. The governor was able to do this because sources of revenue including lottery proceeds and federal funding increased 64% over the same period.

In 1999 we should, however, reexamine the warning of that song and look at what we have done to our state’s tax structure during the past eight years. Certainly, we are continuing to enjoy strong revenue growth but how will our tax structure perform when the economy dips?

A Revenue Structure Task Force appointed in 1992 worked diligently until through 1994 to explore this potential reality. The Public Policy Research group at Georgia State University staffed the task force and it made a number of recommendations that if adopted, would have insured a stable revenue structure in various economic scenarios.

The final recommendations received a nice place on the shelf and extended the “if it ain’t broke, don’t fix it” philosophy. The problem is, we haven’t tested the premise that it’s not broken. This is because we haven’t had a recession or slowdown in the economy. In fact, in the past eight years, state revenue collections have increased an average of 6.4% per year — or a whopping 61.6% for the eight-year period.

 

Sales taxes

While the sky is not falling, perhaps we should examine what might happen when the economy hits a bump.

First, Georgia has moved heavily into sales taxes. They are popular, as taxes go, since everyone pays sales taxes. State and local governments and now even schools are living partially off the sales tax. Historically, the sales tax in Georgia has withstood downturns better that some states — but what about the future?

Because the state’s coffers were full, the legislature decided to exempt food from the sales tax. There is no problem today, since the sales tax is still growing, but when the blip comes, we will find that by removing food from the state sales tax base we have removed the most stabilizing component of the sales tax.

Right now, sales tax growth is the result of exuberant consumer spending for capital items. As new homes are built and equipped, cars are purchased, appliances are replaced and utility sales increase, sales taxes rise. If a recession comes, discretionary spending slows and sales tax collections drop. Since food is no longer taxed, the drop will be even more dramatic.

Georgia has also continued to move to a service economy and the economists tell us that our state has one of the narrowest taxes when it comes to services.

Why should lawn services, barbershops and hair salons, laundries and the like not collect sales taxes?

Another sales tax issue is the impact of electronic or “E” commerce. Because of the ever-expanding use of the Internet and the fact that Internet traffic is doubling every 100 days, we can anticipate this problem continuing to grow.

In 1998 it is estimated that “cyber” shoppers spent $7.8 billion. By the year 2003 this number is expected to reach $108 billion nationally. Of this amount, only 60% is generated by “bricks and mortar” businesses. That is, there is an actual retail outlet in addition to the Internet sales. However, this still leaves 40%, or $43.2 billion, generated by businesses that in most cases are exempt from collecting any sales taxes and it is doubtful that the purchasers are sending in the sales tax dollars to the states.

This could well force an examination of the total sales tax system since it is unlikely that local merchants are going to sit idly by as items are sold electronically without taxes thereby creating unfair competition.

 

Motor fuel taxes

Whether measured by the level of motor fuel taxes and other user fees, or by total financial support in relation to vehicle miles traveled, Georgia’s level of financial support for its public sector transportation program is the lowest in the nation.

As it stands now, because no adjustments have been made to the motor fuel tax, Georgia is in the position of having to spend millions of dollars of “non-user fee” revenues to subsidize the transportation system.

The motor fuel tax is a user fee. If you don’t drive the roads and use the roads and streets, you don’t pay the tax. Why not let the people driving and causing the pollution pay to improve the roads? The motor fuel tax comprised 14.5% of state revenue collections in 1980, but by 1997 this number had fallen to 5.5%. In fact, a great part of the increase in Georgia’s debt in recent years comes from trying to stretch the existing motor fuel into the future by borrowing against today’s collections.

While almost everyone likes low user fees, we need to be sure that the level of service provided is adequate. Adjusting the motor fuel tax will not only give us the resources to build and maintain a more adequate level of service, but a more equitable “user based” system of revenue collections and distributions.

 

Property tax relief

It is probably fair to say that most people would like to see a reduction in the money they spend on property taxes. This year there are many politically popular ideas being discussed that will do just that. However, when making these plans it is seems that the state wants to give away local governments’ funds instead of the state’s. While someone always comes up with complicated systems to appear to reimburse local governments, it seldom works.

If the state has excess revenue, state taxes should be reduced or costs imposed on local property taxpayers should be picked up at the state level. Education is the best example. It currently consumes 59% of the total property tax and this ratio continues to increase.

Property tax reductions would undoubtedly be a welcome relief to everyone, but they need to be structured in a way that isn’t disruptive to local governments’ ability to carry out their service delivery responsibilities.

 

Education funding

Equity in education funding has been a hot topic of debate for quite some time. When you look at how drastically school spending has increased in the last eight years it is easy to see why. Since 1990, the per capita school ad valorem collections have increased from $291 to $388, or 34%.

In contrast, county ad valorem collections have increased only from $157 to $172, or only 10% . To compound matters, Georgia ranks in the top 15 states, with the largest enrollment increase in public elementary and secondary schools. Furthermore, an additional 113,000 students are projected to stream into schools in the decade between 1996 and 2006.

Growth is good, but at the same time there must be sufficient funding to support it. Were the state to handle education funding, the property tax would take care of itself.

We must ask ourselves, Where is the money going to come from to fund this expansion?

Should school ad valorem collections be increased even further?

Is state funding keeping pace with growth? These are serious questions that need to be addressed by the legislature.


Need for study of reform

We would recommend that we use these good times to look at Georgia’s overall tax structure to insure that the services our citizens expect can be continued in the event of an economic downturn.

History has shown that in a downturn, the legislature loses sight of the relationship between the state and local government and the entire focus in on maintaining the state component of the intergovernmental system. This is normal human nature — the same thing happens at the county, school and city levels, where all attention is focused on the individual government’s problems.

Tax commissions or revenue study committees are always perceived as preceeding an inevitable tax increase primarily because they are put together in times of crisis.

That should not be the case.

Maybe if we created such commissions or committees in a time of plenty the public would be better served, and the commissions’ or committees’ objectives better met.

A tax structure study should bring all components – homeowners, farmers, businesses, governments, and industries — to the table, where policy goals and state and local government objectives could be matched with the revenue structure; and assurances reached that the system is balanced, fair, and stable.

Such a study must recognize that we have a single tax structure with many components in Georgia. This entire structure is proscribed by the legislature. There is not a state structure, a local structure and a school structure — yet the approach of the past has been to try to look at each piece in isolation from the others.

Georgia is a great state. Using nearly any economic indicator, Georgia is the leader in the Southeast and we are gaining on national averages.

We have been blessed with good leaders that, while being fiscally conservative, have been willing to make investments where it matters.


Executive leadership

We have a new Governor who, on the day after his election, made it clear that he was not afraid to jump into some very difficult and controversial issues because the issues were key to the continued success of our state. But we are also seeing in Governor Barnes a person unafraid to admit he doesn’t have all the answers, and is willing to use his considerable leadership skills to bring the right people to the table and push them to find the answers.

County governments are a subdivision of the state and as such, we are unique partners with the state. The Association County Commissioners of Georgia is certainly willing to work with the governor and legislature to make sure our future is safe.

 

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