Georgia is among 30 states that have built their state budget assuming that enhanced Medicaid funding will be available through next June, when our budget year ends. Georgia’s budget, as recently signed by the governor, includes nearly $750 million of these funds, also known as the enhanced FMAP. Georgia would only realize half of this amount if the enhanced funding expires on December 31, 2010, as it is currently scheduled to do.

The federal Recovery Act of 2009 enhances federal Medicaid funding to help states survive the Great Recession without making dramatic cuts to Medicaid programs that would worsen the economy. Thanks to the increased federal help granted as states’ unemployment rose and Medicaid caseloads increased, Georgia has not made major cuts to Medicaid eligibility levels or to the reimbursement rates paid to providers serving Medicaid patients, which already fail to cover providers’ full costs for treating patients.

Last week, the U.S. House of Representatives stripped the extended Medicaid funds out of a bill to extend a variety of Recovery Act provisions. The Senate now has the opportunity to restore this temporary extension to stabilize the states a little longer as their economies slowly recover. If Congress does not extend the enhanced FMAP, Georgia’s new budget will be seriously out of balance when the new fiscal year starts July 1.

But this would be just the beginning. Georgia lawmakers are using enhanced Medicaid funding to offset spending that would otherwise have come from state sources, as the Recovery Act intends. If, instead of finding additional state revenues to replace expiring FMAP, lawmakers cut the Medicaid program to save $375 million, the state would also forgo more than $650 million in additional lost federal funds that are in the state’s Medicaid base budget. In total, this $1 billion loss would represent nearly a 15 percent reduction in Georgia’s Medicaid program (state and federal funds included).

A deficit of this magnitude requires significant new revenues or devastating cuts to provider reimbursement rates, eligibility, covered services, or all of the above. Although Georgia lawmakers have not indicated precise alternatives to finding revenues, budget proposals discussed in the recent legislative session indicate that a 20 percent across-the-board cut to reimbursement rates for healthcare providers would be needed if lawmakers do not add new revenues. Cutting reimbursement rates 20 percent likely would result in hospitals closing, many doctors denying service to Medicaid patients, and local economies that depend on their healthcare sector for jobs suffering throughout the state.

If Congress does extend the enhanced FMAP until next July, it serves the dual purpose of giving Georgia lawmakers time to put new state revenues in place before the federal funds expire. Extending FMAP is crucial to Georgia’s ability to weather the Great Recession while avoiding crippling cuts to the healthcare infrastructure of the state.

Timothy Sweeney, MPA, is senior healthcare analyst for the Georgia Budget & Policy Institute, a nonpartisan, independent think tank that analyzes state budget and tax policies.

Lawmakers Cut Education Another Year Despite Historically High Unemployment and Student Growth

Four Options for Our Future

Recovery Act funds alone could not shore up Georgia's education budgets. Lawmakers cut between 13 and 15 percent from K-12, University  System, and Georgia's award-winning Technical College System budgets for the upcoming fiscal year compared to 2009, before these recessionary cuts began.

Thousands of Georgians currently employed by the state education systems will be joining the ranks of Georgia's record unemployment numbers. These include not only teachers, but nurses, cafeteria supervisors, bus drivers, and custodians.

The State Board of Education just eliminated class size limits for the upcoming school year to allow districts to manage state cuts. Additional consequences will be more adjunct faculty at colleges and universities, salary cuts and furloughs, and reduced supportive services such as tutoring, advising, and professional development, as well as more drastic measures for some institutions. 

A few K-12 school systems have already moved to a four-day school week or shortened the school calendar from 180 days to 160 days.

These cuts affect students, faculty, and staff, but also local economies across the state. According to the state’s Department of Labor data, K-12 systems are one of the top 10 largest employers in every county in Georgia, and the number one largest in 96 counties.

In addition, 27 counties have a public post-secondary system among their top 10 employers. As an economist from George Mason University put it recently, "The macroeconomic worry is that widespread cutbacks by states and localities will create a drag on the economy ... It is folly not to recognize the impact on the broader economic recovery."

The intent of federal Recovery Act funds was to give state lawmakers time to address their revenue declines from the Great Recession. Although Georgia's budget deficit has been in the top 10 worst in the nation, lawmakers chose to rely heavily on cutting state services; Georgia lawmakers did not take significant steps to shore up the state's revenue system for education.

Recovery Act funds for education run out in the coming fiscal year, which begins July 1, causing bigger holes in school funding even as Georgia's population of school age children increases, more displaced workers seek job training, and more young people seek post-secondary education in order to enter the workforce. The revenue problem won’t end there, though, as state economists project weak revenues for several years to come, predicting the state will not regain FY 2007 level of revenues until FY 2014. This could mean more cuts in the coming years; without new revenue sources, K-12 and post-secondary education (which comprise more than 50 percent of state spending) likely will continue to face cuts.

Given these prolonged revenue problems, Georgia has four options for future education budgets. One option that gives states another year of time to solve their financial problems is for Congress to pass amendments to the war/disaster supplemental bill to add $23 billion in emergency education funding -- effectively an extension of the Recovery Act's state fiscal stabilization fund. These funds would go to state governments and help prevent education layoffs in Georgia and across the nation.

The other three options are: 1) increasing targeted state taxes such as the cigarette tax and repealing some tax exemptions; 2) shifting the costs to local governments and students; and 3) cutting education programs.

All of these options have policy implications that demand serious discussion. Relying on additional cuts to education, for example, raises questions about equity. Will some communities be able to offset the cuts with local resources, while communities with limited means cannot?

Continuing to vilify revenue measures while giving budget cuts a free pass is hurting our economy. We are faced with a limited number of budget choices going forward, none of which are ideal. A balanced approach to the fiscal crisis, one that includes raising state revenues responsibly and limiting additional cuts to services, will put Georgia in a better position to compete and prosper economically in the 21^st century.

By Sarah Beth Gehl, Deputy Director of the Georgia Budget & Policy Institute, and the report’s author. The report, Highlights of the FY 2011 Education Budgets and the Four Options for Future Budgets is available to download freely at www.GPBI.org. The Georgia Budget & Policy Institute is an independent, non-partisan, nonprofit that analyzes budget and tax policies to inspire responsible decision-making.

Just a week after passing a half billion dollars in more tax breaks for the wealthiest Georgians and corporations, the Senate Finance Committee revived a proposal April 19, 2010 that died in the House on Crossover Day a proposal that eliminates the refundable portion of the Low Income Tax Credit. The Senate could vote on the measure on April 21, 2010 or in the final legislative days next week.

Currently, taxpayers with income below $20,000 are eligible for a tax credit ranging from $5 to $26 for individuals, with additional benefits for the elderly and families with children. If the tax credit exceeds a taxpayer's income tax liability, he or she receives the remaining credit as a refund.
  

More than one million Georgia taxpayers claimed the Low Income Tax Credit in 2007, receiving $29 million in credits. If legislators eliminate the refundable portion of the credit, they will be cutting the Low Income Tax Credit by two-thirds, lowering the total credits to low-income Georgians by $21.8 million.

If lawmakers pursue this proposal because they do not believe in refundability for more than one million of Georgia's lowest-income taxpayers, then it follows that they will also need to enact legislation to correct the refundable nature of certain corporate tax credits.

Corporations doing business in Georgia can claim certain tax credits even if they have zero corporate income tax liability. These include the film tax credit, the jobs tax credit, and the headquarters tax credit. A corporation with tax credits in excess of its income tax liability is able to receive the remaining credits by taking the credits against employee payroll withholding.

Corporate tax credits taken against payroll withholding (the essentially refundable portion) cost $20.9 million in 2007, nearly matching the cost of the Low Income Tax Credit refunds; however, the  Low Income Tax Credit happens to be the only credit  targeted to the very lowest-income taxpayers.

Adding insult to injury, the legislature passed HB 1023, benefiting the wealthiest Georgians by cutting the capital gains tax in half.  It also eliminates the corporate net worth tax for a combined $380 million loss to the state annually. It also passed HB 1055, which eliminates the income tax on retirement income for the state's wealthiest seniors (costing $150 million when fully implemented). These bills await the governor's signature or veto.

Why is the Low Income Tax Credit Refundable?
 
Low-income taxpayers do not have a large income tax liability. Instead, they pay substantial sales taxes since they consume a greater portion of their income than higher income residents do. Georgians earning less than $16,000 pay 7.8 percent of their income on average in state and local sales and excise taxes; however, Georgians earning $62,000 pay 4.4 percent and those earning over $433,000 pay 0.9 percent on average. Click here for a chart on Georgia’s tax liability by the Institute on Taxation & Economic Policy.

The refundable portion of the Low Income Tax Credit (the portion that exceeds income tax liability) is intended to offset some of the sales tax liability of low-income Georgians. In its current refundable form, it offsets a small fraction of sales tax liability for low-income taxpayers, making an overwhelmingly regressive tax somewhat less so. Since relief cannot be targeted specifically to low-income taxpayers through the sales tax, it must be done through the income tax.

Other Practical Options to Balance the Budget

There is no doubt about the fact that Georgia desperately needs more revenues. However, there are many logical and fair options for seeking revenues that do not focus solely on those taxpayers with the least ability to afford a tax increase now or after the recession. Lawmakers should seek either broad-based revenue measures or those targeted at taxpayers with the greatest ability to afford it. One tax credit that most states have already corrected is the deduction for paying state income taxes, which gives filers who itemize a deduction for their state income taxes. Removing this circular deduction would save $450 million a year.

Note to editors:

Sarah Beth Gehl and Alan Essig are available for interviews.

Download the Georgia Budget and Policy Institute's analysis of the proposal to eliminate the refundable portion of the low income tax credit, here. The Institute on Taxation and Economic Policy has an analysis of the bill as well.

Statement from Executive Director Alan Essig:

General Assembly Passes Another Bill to Cut Taxes for the Wealthy, Governor Perdue Should Veto HB 1055

This just in -- there will never be a recession in Georgia again. After we weather this current economic storm, good days will be here again and never leave.
 
That's the stance legislative leadership took today by offering amendments to House Bill (HB) 1055 that carve additional holes into our revenue system. The amendments eliminate the state income tax on retirement income for taxpayers age 65 and over ($150 million), as well as the "quarter-mill" state property tax ($95 million; half of exemption goes to residential owners and half to non-residential owners).
 
But seniors already enjoy a state income tax exclusion on $35,000 of their retirement income ($70,000 for couples) and full exclusion on their Social Security Income. Since the vast majority of seniors are already excluded from state income taxes, this new tax cut is overwhelmingly for the wealthiest seniors (those in the top 10% of incomes).

With these existing exclusions, personal exemptions, and standard deductions for elderly taxpayers, an elderly couple can already have up to $100,000 in income without paying a dollar in state income taxes. (Read our analysis of a similar proposal from 2007.)
 
It does not stop here. Just as the legislature is lamenting the lack of state revenues during this fiscal crisis and urging department heads not to cut critical frontline workers, it has passed a total of $600 million in permanent tax cuts (including permanent tax cuts in HB 1023). Similar to this new senior tax break amendment, the capital gains tax cut in HB 1023 goes overwhelming to those with the top five percent of incomes.
 
In short, the legislature just passed more than a half a billion dollars in tax cuts for the wealthiest Georgians.
 
We must stop this seesaw act of temporary tax increases and permanent tax cuts during recessions. It is fiscally irresponsible. It only sets us up for problems in the inevitable next recession. With two recessions in a decade, it would seem obvious to plan for another for some time in the future.

Based on the current regressive state and local tax system, a $600 million tax cut should be debated with an eye toward making taxes more proportional. These tax cuts in HB 1055 and HB 1023 make the Georgia tax system more regressive.
 
Now HB 1055 moves to the governor for signature or veto.

Governor Should Veto Bill, General Assembly Can Pass a Clean One

In order for Governor Perdue to maintain his record of fiscal responsibility, he should veto HB 1055. The legislature combined permanent tax cuts with much-needed revenue increases in HB 1055, turning the governor's fiscally responsible proposal into a last minute tax giveaway. 

The final version adds to the alarming and long-term structural deficit in Georgia. In addition, this bill along with HB 1023 -- which has permanent tax cuts of $380 million -- could have serious negative implications for Georgia's AAA bond rating.
 
There is another option- an option that would allow the governor to achieve his original proposals of a temporary hospital fee and updates to user fees. House Bill 307, which contains the temporary hospital provider fee, is still viable. The governor still has an opportunity for the clean bill he desires, if lawmakers revise HB 307 to contain both revenue measures.
 
Lawmakers of both parties should vote for an amended version of HB 307 that contains two things, the temporary hospital provider fee and updates to user fees. However, lawmakers are not likely to pursue this sensible alternative unless the governor immediately vetoes HB 1055.

Notes:

1. Bills are not transmitted to the governor until after session. However, the governor can call a bill down at any time, and it will be immediately transmitted for signature or veto. The governor can call HB 1055 and HB 1023 immediately and veto them, giving lawmakers the opportunity to move forward with a clean version of HB 307.

2. House Bill 1055 passed the House several weeks ago with $96 million in updated user fees, helping to close a portion of the $5 billion deficit. The Senate passed the bill with minor changes, and sent it back to the House today. The House amended and passed it with the original fee increases, senior income tax break, state property tax elimination, and three-year hospital fee (House Bill 307), then immediately transmitted the bill to the Senate. The Senate likewise passed HB 1055.

While the General Assembly took a two-week break, it heard from state agency heads and average citizens about the impact of slashing state services by another $1 billion during unprecedented joint budget committee hearings. These testimonies make the long-term, negative impact of additional draconian cuts crystal clear.

Georgia requires bold actions to avoid decimating public structures we all rely on as leaders address historic billion-dollar revenue shortfalls caused by the Great Recession and structural budget problems.

Commonly held rhetoric that better management and greater efficiencies are the answer is grossly overstated. Although they should be one part of the solution, they do not come close to filling the immediate budget hole in this growing state; Georgia already ranks as the eighth best-managed state in the country.

When legislators make more deep cuts, on top of years of austerity cuts, it reverses the investments the state has made and has lasting negative impacts on the health and well-being of our families and businesses.

Additionally, budget cuts cause immediate and negative economic impacts. When the state fires thousands of teachers and other employees, cancels purchases of goods and services from Georgia businesses, and cuts funding to hospitals and other healthcare providers, it further weakens the already weak economies of local communities. 

We must not throw our hands up in despair. Deep cuts are not inevitable. Almost all other states have already taken measures that ensure they continue investing in their people and infrastructure.

Georgia lawmakers can and should take a balanced approach: they must temper significant service cuts with new revenues. This is not the time for political rhetoric or political timidity. 

It is simply not true that raising taxes during a recession harms a state’s economic performance coming out of the recession. Although neither budget cuts nor tax increases are necessarily good for a state’s economy during a recession, cuts are more harmful than certain tax increases. For example, states that raised taxes significantly during the 2001 recession were just as fast, on average, to rebound from the recession as states that did not.

There are many options to raise revenues in a fair manner and with minimal negative economic impact. Some of these include:

• Increasing the cigarette tax by $1 per pack: This not only raises between $300 and $400 million, but also is popular among the public and has significant health benefits, such as discouraging teen smoking.
• A temporary one percent surcharge on income more than $400,000 for married couples and $200,000 for singles: It raises $200 million and affects less then 1 percent of taxpayers. Leading economists agree that taking such actions as firing teachers or state employees is worse for the economy than a marginal tax rate increase on the wealthy.
• Expand the sales tax base to cover additional services (i.e. dry cleaning, pet grooming, repair services, pest control, gym/club membership fees, landscaping).
• Update user fees to more fully cover the cost of associated state services.
• Reduce business tax credits. Lawmakers have no idea as to whether these tax credits are a good deal for the state.
• Enhance collections of existing taxes by adequately funding the Department of Revenue, closing corporate tax loopholes, and enacting reforms to aid in collections.

Will Georgia continue to have a world-class university system, so vital for Georgia’s economic success? Can our children expect to be educated in vibrant public schools with quality teachers and small classes? Can Georgians throughout the state expect a health infrastructure that includes quality hospitals, a trauma network, and health insurance for our most vulnerable children? The actions the General Assembly takes during the next six weeks will go a long way towards answering these questions. A balanced approach to the fiscal crisis will help assure that the answers to those questions are Yes.

By Alan Essig, Executive Director of the Georgia Budget & Policy Institute, a nonpartisan, independent, think tank. The Institute seeks to build a more prosperous Georgia. We rigorously analyze budget and tax policies and provide education to inspire informed debate and responsible decision-making, advancing our vision of a state in which economic opportunity and well-being are widely shared among all.