By Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship, MIT Sloan School of Management
The plan is based on sound economic and fiscal assumptions and allows for the implementation of policy initiatives without tax increases.
This note provides my assessment of the financial viability of Stacey Abrams’ budget plan for the state of Georgia through fiscal 2028. This assessment was carried out at the request of the Stacey Abrams campaign for Georgia’s governor.
Stacey Abrams’ budget plan is fiscally prudent. The plan is based on sound economic and fiscal assumptions and allows for the implementation of Abrams’ proposed policy initiatives without the need for tax increases.
The most important assumption underlying the budget plan is the projected growth in tax revenues, which in turn depends on the state’s economic outlook. Between fiscal 2023 and fiscal 2028, Abrams expects state tax revenues to grow by 4.6% per annum, in nominal terms. This projection incorporates changes in the state’s tax code resulting from the implementation of House Bill 1437 during the budget horizon. Following its initial implementation in 2024, the tax cuts by House Bill 1437 are triggered only after specified budget benchmarks are achieved, which is not expected until fiscal 2028.
The anticipated growth in tax revenues between fiscal 2023 and fiscal 2028 is consistent with the 4.9% per annum growth in Georgia’s tax revenues over the past quarter century and 7.4% per annum growth over the past decade (see Table 1 below; all figures are in current dollars). This is consistent with reasonable expectations for the continued robust growth of Georgia’s economy. For example, in a recent economic forecast, Dr. Rajeev Dhawan, Director of the Georgia State University Economic Forecasting Center, expects personal income growth of close to 6% per annum through calendar year 2024, and gross state product growth of about the same during the period.
It is important to note that the national and Georgia economies are not expected to suffer a severe recession during the budget horizon, although the economy’s growth is expected to materially weaken through calendar year 2023. However, the impact of the weaker economy on nominal tax revenue growth is mitigated in part by the expected high inflation during the next two years. Inflation is projected to steadily moderate, but it is unlikely to be quickly fall back in line with the Federal Reserve’s inflation target of 2% (measured by the national core consumer expenditure deflator).
Abrams’ policy initiatives would be incorporated into the budget by fiscal 2027. The costliest proposal is to increase salaries for teachers and law enforcement. For teachers, the cost is spread over four years, with the first $2,750 increase in annual pay occurring in fiscal 2024. By fiscal 2027, the entire proposed $11,000 annual salary increase would be in place. The budget cost for these higher salaries increases from just over $400 million in fiscal 2024 to $1.6 billion when fully implemented in fiscal 2027. Law enforcement salaries increase by $6,000 in fiscal 2024 and again in fiscal 2025 at a budget cost of $155 million by fiscal 2025. The cost of Abrams’ proposed expansion of Medicaid coverage is also significant, estimated at $297 million in FY 2024 and growing between $16 million and $18 million yearly after that.
Given the expected tax revenue growth in Abrams’ budget plan and the amount of the state’s current undesignated reserves, the costs of Abrams’ policy initiatives are adequately funded through the budget horizon. In other words, the state will have enough revenue to cover her policy initiatives while also maintaining an adequate reserve with no tax increases.
In addition, there is a substantial cushion provided by currently available reserves. According to the State Accounting Office FY 2022 Report on Revenues and Reserves, the state ended Fiscal Year 2022 with a General Fund balance of $11.82 billion, of which $5.24 billion constitutes the revenue shortfall reserve, which is constitutionally capped at 15% of prior year revenues. This leaves $6.58 billion in undesignated reserves, which are available for appropriation. The Abrams budget plan assumes that the undesignated reserve will fund the gas tax suspension through December 2022 (costing $1.6 billion), that the Abrams proposed tax rebate is implemented ($1 billion), and that the Abrams FY 2024 budget initiatives are funded ($1 billion).
The undesignated reserve will then total roughly $3 billion, allowing for $900 million to fully fund Abram’s budget initiatives in FY 2025 through FY 2027. In FY 2028 the budget will no longer be supplemented with undesignated reserve revenues.
While there is significant uncertainty in any economic and budget projection, the Abrams budget plan for Georgia is appropriately prudent and does not rest on overly optimistic revenue assumptions. The Abrams budget plan strikes a reasonable balance between fiscal prudence and expanding the state’s support for a range of initiatives, without raising taxes.
|Table 1: Historical Revenue Growth|
|FY 1998||$ 11,718,182,319||FY 2011||$ 16,558,647,528||8.8%|
|FY 1999||$ 12,696,109,796||8.3%||FY 2012||$ 17,269,975,474||4.3%|
|FY 2000||$ 13,781,937,492||8.6%||FY 2013||$ 18,295,858,589||5.9%|
|FY 2001||$ 14,688,987,803||6.6%||FY 2014||$ 19,167,806,643||4.8%|
|FY 2002||$ 14,005,479,208||-4.7%||FY 2015||$ 20,434,743,033||6.6%|
|FY 2003||$ 13,624,846,657||-2.7%||FY 2016||$ 22,237,392,599||8.8%|
|FY 2004||$ 14,584,644,741||7.0%||FY 2017||$ 23,268,421,512||4.6%|
|FY 2005||$ 15,813,996,667||8.4%||FY 2018||$ 24,319,869,276||4.5%|
|FY 2006||$ 17,338,759,588||9.6%||FY 2019||$ 25,571,064,702||5.1%|
|FY 2007||$ 18,840,441,639||8.7%||FY 2020||$ 25,478,916,446||-0.4%|
|FY 2008||$ 18,727,812,623||-0.6%||FY 2021||$ 28,591,830,272||12.2%|
|FY 2009||$ 16,766,661,804||-10.5%||FY 2022||$ 34,934,855,313||22.2%|
|FY 2010||$ 15,215,790,786||-9.2%|