Q-and-A with Sarah Beth Gehl

Sarah Beth Gehl is the deputy director of the Georgia Budget and Policy Institute where she specializes in tax policy, economic development and workforce development. She is the author of the annual 'State of Working Georgia' report and is the co-author of the 2006 book Center for a Better South, Doing Better: Progressive Tax Reform for the American South. Recently, she was named one of Georgia's '40 Under 40' by Georgia Trend.

Gehl responded to some questions I sent her last week regarding the state's slumping tax revenues, the report on working Georgians and policies to spur job creation ...

Q 1 & 2: One of the more puzzling pieces of data in the October tax collection numbers was the fact that Georgia's corporate tax revenues were actually negative. For everyday laymen who come across that weird number, what exactly does that mean? Given that Georgia paid out roughly $5 million in corporate tax refunds, how do those two numbers reconcile with each other? And, quite frankly, in the context of our ongoing budget crisis, what impact does that have on our overall fiscal situation? At a surface glance, it appears that we're merely subsidizing Georgia's business community?

A: Analysts typically don’t try to make a claim about revenues based on one-month data, since certain months can show wide variation. Corporate tax returns and refunds are very cyclical. One large refund can skew a single month’s numbers, for instance.

However, if we look at Georgia’s corporate tax revenues by quarter or over several months we get a clearer picture of what’s happening: Although corporate income taxes were negative for one month, year-to-date corporate tax revenues are $166 million. Year-to-date, corporate income taxes are down 22.6 percent over last year’s levels through October.

The year-to-date decline for corporate income tax revenue is part of the larger revenue problem in Georgia — lawmakers made a budget that relies on the state to collect as much in revenues this fiscal year as it did in 2005, but it has almost one million more residents to provide education, public safety, food safety, vaccinations – you get the picture – for, and many more people falling into poverty and needing training, foster homes, and other services due to the recession.

For example, the technical colleges are enrolling 24 percent more students this fall compared to last fall. Demand and population are up, but we will collect the same amount of revenues as in 2005. That doesn’t even provide for normal inflation costs.

Part of this revenue decline is due to the historic recession, but another portion is due to the state’s structural deficit, in which Georgia’s revenue structure no longer meets the needs of the state.

The corporate income tax shouldn’t be singled out as the culprit, necessarily, because we have a revenue problem throughout our tax system. But there are improvements lawmakers should make; for example closing corporate loopholes and reviewing special interest tax breaks.

The income tax hasn’t changed since the 1930s. Similarly, the sales tax is stuck in the 1950s. The corporate income tax, along with the sales tax, is riddled with credits and exemptions, some of which have not received scrutiny in decades. We don’t even know what works and if one unfairly helps a certain business at the expense of another industry.

There are adjustments and modernizations that need to happen across the system – corporate income tax, personal income tax, sales tax, and others. North Carolina and several other states are beginning tax commissions to do just this, and Georgia should do the same. One important step is Senate Bill 206, which passed Georgia’s Senate unanimously in the 2009 legislative session and will come before the House in 2010.

SB 206 requires a tax expenditure report that details the tax breaks currently in the system for their cost and effectiveness. This gain in transparency will be a giant first step in bringing some accountability and rationality to our current practice of carving certain people and businesses out of the tax base at the expense of the state as a whole.

3. The State of Working Georgia was interesting and depressing at the same time. As the report notes, the decade has been, for all practical purposes, been lost. How much of this is the result of larger economic circumstances (i.e. the recession, the rise of the global economy, etc.) and how much of this can be attributed to poor policy? Obviously both are connected, but the report suggests Georgia regressed further than other states.

A: The recession is undoubtedly the leading factor in the current job loss, as we’re seeing substantial job loss in almost every state. Although it is tough to insulate any state from a national economic recession, we need to use the tools at our disposal in an effective manner.

What are our tools? Quality of life essentials are some of the greatest spheres of influence that our state leaders can affect to expand opportunity for families and create a healthy climate for business growth. These essentials include an educated workforce, modern transportation system, adequate water supply, and a well-functioning court system.

The recession should be forcing all of us to ask: How can we best position ourselves to make gains when prosperity returns to the nation?

Is the answer more cuts to technical colleges as 24 percent more students are seeking an education that will in turn give us a more capable work force? One in 7 undereducated Georgians are unemployed, yet only 1 in 35 Georgians with a college education are unemployed.

Do we position ourselves to pave the path out of the recession by investing less in infrastructure or services for families experiencing hardship?

That is what the General Assembly did last spring through more special interest tax breaks with the unfounded philosophy that giving tax breaks to some will “pull us out of the recession?”

In a balanced budget state, we cannot have both more investment in quality of life essentials and additional tax breaks. Passing out special interest tax breaks, to the detriment of the services we all demand and enjoy, has not protected us from this recession – in fact, Georgia has been among the worst for job loss and unemployment, as you rightly pointed out.

What makes us think that the way lawmakers have been operating — more special interest tax breaks and less investment in education, safe communities, and infrastructure is the answer for pulling us out of the recession?

4. Last session, Republican leaders offered a few ideas aimed at job creation, including a hiring credit for employers. In retrospect, would those proposals - that one in particular - have proven to be effective? If not, why so? Are there other barriers from a policy angle hindering job creation (i.e. higher than usual corporate tax rates, poor infrastructure investments, etc.)?

A: The so-called JOBS bill would have definitely been ineffective, whether we assess it through an economic lens or a revenue lens. Take a look at this policy memo from Georgia State University Fiscal Research Center: They performed analysis of the economic effects of one of the larger pieces of that bill – the capital gains tax cut – right after session ended and before the governor vetoed the bill. I don’t think this memo has gotten enough attention and it’s an interesting read.

One key line from the tax experts reads: “Because of how states tax capital gains, the effect of a cut in Georgia’s tax on capital gains will likely provide little incentive to increase investment in Georgia.”

Georgia has a balanced-budget requirement. Since lawmakers must balance the budget, any tax breaks right now are going to cause further reductions in services, including education, public safety, and human services. Cuts to services also mean cuts to jobs. When one thinks of the person who gets hired due to a tax credit, one must also think of the K-12 paraprofessional, for example, who gets fired due to lack of revenues.

Such a policy by the federal government might work because the federal government can deficit spend (i.e. no balanced budget requirement). The federal government can both offer tax credits and increase services.

Governor Perdue’s veto statement makes it clear that this legislation would have meant a loss of significant revenue at a time of declining revenues: .

The governor did the right thing in this case, but the legislator should not have passed the bill in the first place. This is an example of potentially catastrophic lawmaking based on poor public policy not borne out by facts. We’ll all need to keep an eye on the bills that come up this spring and make sure that they protect our diminishing quality of life essentials at the least, and certainly not aid our state to fall back even further.