Georgia's economy, tax cuts, and revenues raise modest concerns

Georgia's weakening economy and the long-run impact of recent tax cuts are concerns, credit analysts say, albeit ones the state's triple-A bond ratings may ride out successfully.

The state's unemployment rate has gone up for four consecutive months, according to the U.S. Bureau of Labor Statistics.

The GOP-dominated state government has been cutting the top income tax rate since 2018, leading to the abandonment of graduated rates for tax year 2024, replacing a 5.75% top rate with a 5.39% flat rate that would be cut .1% every year, if revenue requirements are met, until reaching 4.99%.

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"We continue to watch the effects of recent reductions to the personal and corporate income tax rates on Georgia's future revenue growth picture, which could tighten fiscal margins at a time when the macroeconomic and revenue picture is evolving," said Thomas Zemetis, director at S&P Global Ratings, which rates Georgia AAA.

"Over our outlook period, however, Georgia's near-term economic conditions and growth prospects, driven by favorable population and productivity gains, could blunt or offset the state's $660 million projected revenue loss," Zemetis said. "The state has also built-up high reserves in its revenue shortfall reserve and also has a large undesignated surplus to mitigate potential revenue shortfalls, should actual performance fall short of expectations."

In fiscal 2024, the state government took in $32.94 billion, the Department of Revenue reported.

That was down 0.5% from fiscal 2023, but the adjusted decline was 3.4% after adjusting for gasoline excise tax suspensions during fiscal 2023.

Georgia's $16 billion of state income tax collections in fiscal 2024 were down 5.6% year-over-year.

"We are also keeping a close eye on the state's ability to manage recent expenditure growth and achieve structural budget balance as tax rate changes are implemented, particularly as the state addresses longstanding infrastructure, state and educational workforce, and other service needs that come with a growing economic base and population," Zemetis said.

The state's unemployment rate rose to 3.6% in August from 3.1% in April. According to BLS's household and employer surveys, total employment declined from July to August.

"Georgia's economy has lost some momentum recently," Wells Fargo Economics said in a report issued last week.

Inflation-adjusted gross domestic product growth went from 6.1% in 2021 to 2.6% in 2022 to 0.8% in 2023, though it rose at a 2.3% annualized rate in the first quarter of this year, which is the most recent data available.

"Higher interest rates have specifically weighed on hiring in the manufacturing, transportation and information sectors," Wells Fargo Economics said.

An economic storm may be brewing in the state's ports. The International Longshoremen's Association, which represents workers at East Coast and Gulf Coast ports, has indicated it will go on strike if no contract is reached with the U.S. Maritime Alliance by Monday. The association represents workers in the Georgia ports of Savannah and Brunswick and a shutdown would impact various parts of the state's economy.

The state government also enacted a law in the spring reducing the corporate tax rate to the individual income tax rate.

Eric Kim, head of U.S. state ratings at Fitch Ratings, told The Bond Buyer the agency's focus on its AAA Georgia rating is on how the tax cuts play out. He said Fitch believes the state's economy is strong and will continue that way in the near term, aiding revenue growth.

"Slowing but still strong is my assessment [of the economy]," said Joseph Krist, publisher of Muni Credit News. "My actual concern is that like many states, Georgia enacted significant tax cuts under the cover of extra funding during COVID." Overall, Krist said he had little concern about the credit.

"Despite the economic headwinds felt on the national level and around the world," Garrison Douglas, spokesperson for Georgia Gov. Brian Kemp, told The Bond Buyer, "thanks to the strength of Georgia's economy our state continues to create a record number of jobs and experience an unprecedented amount of people joining our workforce."

Howard Cure, director of municipal bond research at Evercore, said, "while the state's economy is slowing it is still fairly healthy. It would be hard for the state to replicate the recent growth and a return to more normal growth levels seems inevitable."

Continuing migration of young and well-educated people into the state should help the growth.

The Georgia government has also been aggressive in offering tax incentives to developing industries like electric vehicle manufacturing.

The reduced economic growth should not have a significant impact on the state government's revenues, Cure said. The state benefits from a history of conservative budgeting and the state's primary rainy-day fund is funded at its statutory maximum, 15% of general fund receipts.

Some analysts said Georgia's heightened exposure to hurricanes due to its exposure to the Atlantic Ocean and Gulf of Mexico is a concern. Its more than 100-mile coastline on the Atlantic includes Savannah, an increasingly important port.

In Moody's ESG issuer profile scores, the environmental score is somewhat negative for the state's credit. The score "reflects its coastal exposure to hurricanes. According to Moody's Climate on Demand, 13% of Georgia's GDP is exposed to heightened hurricane risk, which is above the national average but below most other coastal states. Georgia also has high exposure to wildfires and medium exposure to heat stress and flooding."

But these physical climate risks "do not have a major effect on the state's credit quality given its significant reserves, low debt, growing economy and benefit of federal emergency aid after natural disasters," Moody's said.

Georgia's economic engine is mainly in the inland northern area, which includes Atlanta, Cure said. "That is not to exclude Savannah and its increasing prominence based on its enhanced port and strong potential in trade and distribution. However, while Georgia has heightened hurricane risk compared to the national average, it is still below most other coastal states."

Moody's explained its Aaa rating of the state in August by saying it expects the state to maintain strong reserves in the next few years due to continued conservative budgeting. Moody's expects what it described as solid continued population and employment growth will support the state's credit quality.

The state benefits from low leverage and fixed costs from debt, pensions and other post-employment benefits as well as wide authority to raise revenues and cut spending, Moody's said.

Total long-term liabilities as a percent of own-source income were 69.7% at the end of fiscal 2023, compared to the end of fiscal 2022 50 state median of 127%, according to Moody's. Georgia's adjusted fixed costs as a percent of own-source revenue was 4.2% at the end of fiscal 2023, compared to the end of fiscal 2022 50 state median of 4.7%.

As a credit negative Moody's mentioned average state incomes remained below the national average.

On Georgia S&P in July made similar points as Moody's. It said it expected the state's inflation adjusted gross state product to grow 2.4% in 2024, 2.1% in 2025 and 1.9% in 2026.

Georgia government's projections for revenues incorporate this potential economic softening.

S&P said the state's fiscal 2024 revenue decline was primarily due to the tax cuts.

Moody's in September upgraded the state's two distinct Garvee credits both to Aa3 from A1 and A2, following the publication of new U.S. States and Territories methodology that aligns such ratings closer to the issuer's rating.