Managing Georgia’s finances in a responsible way is one of the most sober and sacred responsibilities of state lawmakers. Families and businesses in Georgia’s largest cities and smallest towns can’t thrive unless lawmakers are able to raise sufficient tax revenue, or to borrow money at decent rates. Our elected state officials need financial flexibility to make cost-effective investments in schools, roads and other public resources key to our quality of life. As Georgia’s state auditor from 1999 to 2012, I worked to provide the General Assembly and governor with sound information to help guide their stewardship of the state’s treasury. Today I’m briefly coming out of retirement to warn that a pair of tax bills threatens Georgia’s ability to prudently manage its finances and ensure taxpayers get a good return on their investments.
Anyone who’s ever balanced a checkbook knows keeping a healthy stream of income and maintaining access to credit at competitive rates are two essential pillars of a strong family balance sheet. This fundamental financial wisdom also holds true for the state a whole. Lawmakers need a range of tools to raise sufficient tax revenue to pay the state’s bills. That flexibility also earns the state a good credit rating so taxpayers get a good deal when Georgia borrows money for big-ticket public works, such as new university buildings or roads and bridges.
Two pieces of legislation with a chance to become law in the final weeks of Georgia’s legislative session threaten to undermine those financial lynchpins. Senate Resolution 756 and House Bill 238 both could slash Georgia’s personal income tax, the revenue source for nearly half of the state’s yearly tax collections. Either of the bills could destabilize the state treasury, draining it of hundreds of millions in lost revenue each year. The damage could be even worse if the measures are passed in tandem. That could open up considerable budget shortfalls and threaten both state and local services families and businesses rely on.
The worst aspect of the two-part legislation is the potential to tarnish Georgia’s stellar AAA bond rating. That golden credit status allows lawmakers to save taxpayers millions each year with low interest rates on borrowed money. Most families must take out a mortgage to buy a home. Similarly, states must borrow to pay for big capital investments. Some states get a better deal than others when they borrow based on financial track record. Georgia’s relatively strong track record for responsible financial management and saving for rainy days ranks it as one of only 10 states that earns a AAA grade from each of the three national rating agencies.
That status could change if state lawmakers set in motion a process designed to slash income taxes. That is especially true if they cement the problem in the state’s constitution as SR 756 proposes. One of the key factors bond agencies evaluate to judge a state’s’ credit worthiness is the overall revenue structure to make sure lawmakers can raise enough money to balance the budget.
Georgia legislators know this danger firsthand. Just two years ago lawmakers put a constitutional amendment on the ballot to cap the state’s personal income tax rate at 6 percent and voters approved it that November. Analysts at Moody’s, one of the top three national ratings agencies, quickly sounded the alarm. “A significant strength of state management lies in its broad powers and resources to manage its finances in the face of volatility… Georgia’s constitutional cap has stripped the state of that option with respect to its personal income tax,” they reported soon after voters approved the amendment. This year’s resolution would worsen the effect of the prior amendment by locking a rigid new formula of ongoing tax cuts into the constitution. The permanence of a constitutional amendment means only a supermajority of future lawmakers can override the formula in the case of a natural catastrophe or a deep recession.
We only need to look to the west to see what the bond rating agencies think of states that destabilize their finances with reckless tax cuts. Kansas is still reeling from the fallout after a 2012 tax cut created significant budgetary challenges and triggered a credit downgrade.
Let’s hope Georgia lawmakers take a look at the Kansas example and heed its warning as a cautionary tale before they pass a point of no return. None of them would want to be governor the day the bond analysts announce Georgia’s credit downgrade.