Gov. Sonny Perdue’s explanation for vetoing the capital gains tax cut

Of 16 vetoes just announced by Sonny Perdue, the governor decided that his rejection of H.B. 481 required the most detailed explanation.

The measure contained a mix of business tax cuts and — more expensively — capital gains tax cuts. Here’s the statement in its entirety:

Georgia is constitutionally required to maintain a balanced budget: for every dollar in decreased revenue, we must correspondingly cut expenditures. We cannot deficit spend as the federal government does, even if those deficits generate economic growth in the long term. Recognizing this constitutional obligation, my administration, working with the General Assembly, has cut taxes in each year I have been in office. Together, we provided conservative, targeted and job-creating tax relief to Georgians. This year I have continued this approach by signing certain bills that establish or continue tax cuts where possible.

Consistent with the economic downturn experienced across our country, in Fiscal Year 2009 state general fund revenues are expected to be $2.7 billion less than the original revenue forecast for the Fiscal Year 2009 Budget. Given this reduction of 13.3%, the State has drastically and appropriately reduced employment and the purchases of goods and services in order to live within our means.

Furthermore, in Fiscal Year 2010 state revenues are currently forecast to be $17.0 billion, an amount that is 16.8% below Fiscal Year 2008 state revenues, demonstrating negative revenue growth in three years. During a period of growth in our economy, the budget may be able to absorb tax cuts that result in short term revenue reductions but provide long term economic benefits. We are not, however, experiencing a growing economy at this point. Accordingly, the current budget environment – where revenues are continuing to decline and not expected to recover in the near term – the short-term revenue reduction resulting from large tax cuts cannot be sustained in a manner consistent with the budgets passed by the General Assembly.

The General Assembly enacted a budget that contemplates current falling revenue but does not incorporate the additional, significant estimated revenue reductions resulting from House Bill 481. While some argue these tax reductions will ultimately generate more revenue, the constitutional restraint of a balanced budget prevents policymakers the luxury of time to allow that growth to overcome the short-term loss of revenue. Should the General Assembly choose to enact a budget next session that incorporates the estimated revenue reductions caused by large tax cuts, I would entertain such cuts at that time.

House Bill 481 combines a number of tax and fee provisions. These provisions include: a suspension of certain business activity filing fees with the Secretary of State; changes to the unemployment tax; a $2,400 per employee tax credit provided to companies hiring employees meeting certain conditions; a phase out of the estimated sales and use tax paid by certain retailers collecting sales and use tax; the elimination of the net worth tax paid by companies; and a reduction in the long term capital gains tax rate. Estimates of the revenue impact to the State and the related additional cuts in services to residents as well as reductions in state purchases and employment aggregate in excess of $1.5 billion over the next three years, with over $145 million in reductions required in Fiscal Year 2010, which begins on July 1, 2009. Given that (1) Georgia cannot deficit spend; and (2) the additional revenue reduction of over $145 million in Fiscal Year 2010 with even larger reductions projected in the years to follow, more drastic cuts would be necessary in needed services and other expenditures. Such cuts are not supported by the current budget act and the policy decisions expressed therein. In short, while this legislation may be supportable in different economic times, given our constitutional and fiscal constraints, I do not believe this legislation, although well meaning in intent, can be afforded at this time. Therefore, I VETO HB 481.

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