Republican Gov. Brian Kemp’s administration has directed state agencies to freeze spending next year and prepare for possible budget cuts as the state faces new headwinds after years of post-pandemic surpluses.
The instructions come two months after Kemp signed an election-year income tax cut that blew a $1.3 billion hole in the budget. Georgia still has ample budget reserves and a growing economy, prompting credit rating agencies to give the state their top scores.
But the reserves are shrinking as state lawmakers cut taxes and increase spending. Also, steep federal spending cuts are on the way.
Although the Kemp administration said it believes Georgia will have enough money to pay for state services, the July 17 memo from the Governor’s Office of Planning and Budget said contingency plans for “efficiencies and savings” are needed to “help ensure the state can respond effectively to changing economic conditions or new budget priorities that require the reallocation of existing resources.”
“Through common sense, conservative budgeting, the State of Georgia has remained on strong financial footing the last several years and has weathered financial storms that have had worse effects on other regions,” Kemp spokesperson Annalise Morning said in a statement. “The Governor’s latest budget instructions will preserve that foundation and keep Georgia in a strong financial place for the future.”
Still, legislators from both parties worry that rising costs and flat revenue could force them into uncomfortable choices about taxes and spending in the years ahead.
“Five years from now, if we did no expansion of anything we’re doing, it would still cost us more to deliver those services,” said state Sen. Sonya Halpern, D-Atlanta.
Credit: Arvin Temkar/AJC
Credit: Arvin Temkar/AJC
Coming out of the COVID-19 pandemic, Georgia enjoyed years of relatively easy budgeting. An influx of federal funding helped swell the state’s coffers. High inflation meant rising prices for consumers but also rising sales tax revenue for the state. A booming economy and population growth meant higher income tax receipts.
State spending grew 40%, to $38.5 billion, from fiscal year 2020 to fiscal year 2027, which began this month. Sen. Blake Tillery, the Republican chair of the Senate Appropriations Committee until he leaves office in January, said most of the new spending was for salaries, including raises for teachers, police officers and other state employees.
Georgia’s reserve funds also grew. The state’s undesignated reserves and “rainy day” fund — money set aside in case of revenue shortfalls — grew to a combined $16.5 billion two years ago. That was enough to run state government for nearly six months.
Awash in cash, Kemp and the General Assembly returned billions of dollars to taxpayers through reduced income tax rates and refunds.
Credit rating agencies have blessed Georgia’s budget practices. Last month, Fitch, Moody’s and Standard & Poor’s renewed the state’s AAA ratings, citing Georgia’s growing economy, solid reserves and “strong fiscal governance.”
But Georgia and other states also face fiscal headwinds. Last year, Congress approved President Donald Trump’s One Big Beautiful Bill Act, which will reduce federal spending and shift costs for some programs to the states.
The law is expected to cost Georgia $10 billion in Medicaid funding over 10 years. Among other things, Georgia also could be on the hook for hundreds of millions of dollars in costs for food stamps. Much of the impact is still to come.
Meanwhile, both major party candidates looking to replace Kemp next year have pledged to further reduce spending. Democratic nominee Keisha Lance Bottoms, the former mayor of Atlanta, has pledged to eliminate income taxes for teachers. Republican nominee Rick Jackson has promised to cut the state income tax in half in four years and work to eliminate it over the next eight years. Neither candidate has said how they planned to replace that lost revenue.
After years of steady growth, state revenue has plateaued amid the tax cuts. This year, Kemp signed a measure that shields more of people’s income from state taxes by raising the standard deduction by 25%. It also exempts up to $1,750 in cash tips and $1,750 in overtime income from taxation through 2028. Plus, it reduces the tax rate from 5.19% to 4.99%. If the state meets certain revenue targets, the rate would fall to 3.99% over eight years.
Two days after he signed the tax cut law, Kemp announced it had blown a $1.3 billion hole in this year’s budget. He vetoed more than $300 million of spending to offset some of that deficit. The rest likely will be covered by reserve funds.
But after years of tax cuts and new spending, those reserves are shrinking. They fell to $14.6 billion last year and to an estimated $8 billion this year. That’s still high by historical standards. But Kemp has warned lawmakers that money will be needed to cover spending in hard times that eventually will come.
Halpern said she wonders how the state will pay its bills if it continues to reduce income taxes — its largest source of revenue. She said the state will either need to revoke those tax cuts — which Halpern said no one wants — or find other sources of revenue. One possible source: She noted Georgia’s tobacco taxes are among the lowest in the nation.
Credit: Arvin Temkar/AJC
Credit: Arvin Temkar/AJC
Tillery sees another source of revenue: ending billions of dollars in tax breaks for data centers and other special interests. He said he also believes state government will need to become more efficient to control spending.
“Our spending side has risen to reach our revenue, and that’s going to be problematic,” he said.
State agencies will submit their proposed budget to Kemp’s office in September, but it will fall to his successor to present a proposed 2028 budget in January.
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