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A fix for the free market
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Years of research by the Georgia Public Policy Foundation have yielded a sad truth: If free market academics are few and far between in Georgia, free market economists have been scarcer than hen’s teeth.
But a new research center in Georgia and its first study show the promise of shining a new light on the state’s budget, taxes and spending.
The day that Americans have earned enough money to pay all federal, state and local taxes for the year is celebrated as Tax Freedom Day, and the Tax Foundation put that day at April 9 in Georgia, one day before the national average. Even as taxpayers celebrate their freedom, legislators are girding for battle under the Gold Dome, challenged by growing budget shortfalls and shrinking revenues as they face their constitutional mandate to balance the budget. Now, more than ever, Georgia needs a fiscally conservative focus on solutions that preclude taking more money from already-struggling taxpayers to fund government.
Stepping up to the plate is the recently launched Laffer Center for Global Economic Growth at Mercer University. The title of its new study says it all: “Increasing Taxes During a Recession: The Wrong Medicine for Georgia.” Researchers Scott Beaulier and Mark Adams score a home run in their focus on taxes. They warn that increasing taxes will disproportionately harm poor families and fail to deliver the expected revenue. In fact, they warn, some of the proposed taxes have been shown to reduce revenue.
“Economic studies have shown tax cuts are more effective than spending at creating stimulus,” they write.
“Instead of trying to fund spending with new taxes, policy-makers should cut spending to fund pro-growth fiscal policies.”
They cite economist Ed McMahon’s study of several states that found “increases in taxation on the wealthy were followed by sudden declines in the number of wealthy filers.” Read between the lines: Wealthier taxpayers move to friendlier climes, and state revenues are consequently reduced by a policy intended to increase revenues.
For example, they warn, the proposed tax on hospital beds expected to help fund a Medicaid shortfall will, in fact, “raise health care costs to consumers, raise insurance premiums, and will lead to additional tax increases as the costs of Medicaid and Medicare rise in response to higher medical care costs in Georgia.”
“Higher health care costs will lead to more uninsured Georgians. When patients cannot afford to see their doctor, they are more likely to end up in the emergency room; as a result, taxpayers are more likely to end up footing the bill.”
Last year, Governor Sonny Perdue vetoed a bill that would have halved Georgia’s 6 percent capital gains tax on long-term investments, citing a choice between the tax cut and “needed services.” This year, both chambers have once again handily passed legislation to cut the rate in half. HB 1023 awaits the Governor’s signature. Lower capital gains taxes lead to more investment, therefore more jobs, and reduce the time and money people spend trying to evade taxes, Beaulier and Adams note, adding, “It is wrong to think of one of the choices as a ‘needed service’ and tax cuts as chopped liver.
Both options have desirable properties and it is hard to think of a better time for tax cuts on investment.”
The key to controlling taxes is controlling expenditures, and controlling government’s growth is key to that. As the Foundation noted recently, Georgia’s budget shrunk 23 percent from FY 2009 to FY 2010 yet the state workforce declined by just 7 percent, not including the University System.
Comparing the 2011 budget and actual 2008 spending, total spending increased by 18 percent at the Department of Community Health, 2 percent at the Department of Education and 4 percent at the Board of Regents – the three agencies that represent more than 70 percent of the 2011 budget.
Most importantly, the study urges the state to focus long-term: to adopt constraints that set limits on overall spending, preferably by constitutional amendment, and can only be overturned by voters in a general referendum: “Adopting constitutional spending limits would promote growth and job creation, and reduce the harm caused by future downturns,” they say. They recommend tying spending to GDP growth, an inflation rate or the population change.
“Politicians desperately seeking revenue always want things to be different when it comes to taxation, but wanting doesn’t make it so,” Beaulier and Adams point out. “Again and again, people find ways around bad policies. They will do so again in response to the tax increases likely to come out of the 2010 session, and residents of Georgia will be worse off when we lose our brightest and most innovative residents.” Worse, a Georgia that provides a poor tax environment will no longer be one of the top destinations for tax refugees from state such as New York or California.
Read the Laffer Center study at

Dodd is vice president of the Georgia Public Policy Foundation, an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians.
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