Tax reform proposals need a sales-tax rate cut, too

The bad news about the state tax reforms proposed last week is they didn’t do enough to keep tax reforms from becoming tax hikes. The good news is there’s an obvious remedy.

But first, a primer on what the Special Council on Tax Reform and Fairness for Georgians recommended.

The headlines are: lowering individual and corporate income taxes by 2 percentage points to 4 percent and eliminating some exemptions; dropping certain exemptions to the state sales tax, most notably the one for household groceries; and adding the sales tax to certain services and online purchases.

The goal was to be “revenue neutral.” But the council’s own estimates show the measures, taken together, would increase tax revenues by at least $1.1 billion, or about 7.5 percent more than their current, recession-deflated levels. Using higher estimates in the council’s report, the rise could be as large as $1.4 billion, or almost 10 percent. (Revenue estimates are not provided for some proposals, so these numbers may rise or fall somewhat — though probably not dramatically.)

You don’t get from “revenue neutral” to a billion-dollar tax hike without raising a lot of people’s taxes.

Most businesses’ taxes would go down, in a way that simplifies the tax code and removes the majority of tax breaks tailored to specific industries or even companies. This part of the package should help the economy while maintaining equity for companies, whether they pay income tax at corporate or individual rates.

But for most Georgians, income taxes would fall only slightly — about $50 per year across much of the middle class, according to illustrative tax tables in the council’s report. Upper-income individuals and families fare better, realizing the full 2-point drop in tax rates at different income levels, depending on the type of filer. But few Georgians, regardless of income, are likely see a net reduction in what they pay to the state, once they account for additional sales taxes.

It gets worse: One of the recommendations is to broaden the income-tax base by changing the way the state calculates taxable income. While it’s hard to tell exactly how Georgians’ adjusted gross income would change, a rise of as little as $1,000 could more than negate the effects of the lower rates.

That’s the bad news. Now, here’s that obvious solution: Lower sales-tax rates.

The best reason to broaden the tax base is to lower rates. Citizens may end up paying about the same amount of total taxes, but the result should be more efficiency and stability, and fewer distortions.

In this case, the income-tax base has been broadened and the rates lowered — but the sales-tax base has only been broadened. The result is a sales-tax hike of anywhere from $1.3 billion to $1.6 billion a year, according to the estimates in the council’s report.

I’ve done some rough math based on state sales-tax receipts in past years, and I think the council’s package could be made truly revenue-neutral by lowering the sales-tax rate from 4 percent to 3.5 percent or even 3.25 percent.

I took the mid-point of the council’s variable revenue estimates, then calculated an average of sales-tax receipts in the years leading up to the recession. My very rough estimate is that combining the council’s package with a sales-tax rate reduction to 3.5 percent would yield a net tax hike of about $375 million. Or go further: A reduction to 3.25 percent would actually cut taxes by some $80 million.

Which combination would be more “revenue neutral” depends on how revenues would change. Remember, not all the income effects of these state tax reforms were estimated in the council’s report.

But I know this: A range of minus-$80 million to plus-$375 million is in the ballpark. A tax hike of $1.1 billion is not.