If all goes according to plan, sometime today the state Senate will pass a bill tinkering with Georgia’s tax code. Thus will two years of ambitious thinking about tax reform end not with a bang, but with a whimper.
The way to think about this tax package, HB 386, is not whether it’s bad on its face. Some parts of it are clearly good; others elicit more of a “meh.” It’s more good than bad.
Rather, the real problem is this bill makes it harder to achieve the very bold tax reforms discussed since 2010.
I’m talking about lowering the personal and corporate income tax rates as low as a flat 3 percent from today’s top rate of 6 percent. That’s a worthy goal for a state sandwiched between two rival states, Florida and Tennessee, with personal income tax rates of zero. A third, South Carolina, is currently moving toward halving its own income tax rate to 3 percent.
A special council created in 2010 to study tax reform recommended just such a reduction to help Georgia remain competitive. It was a big recommendation, a controversial recommendation, but also a well thought-out recommendation.
The businesspeople and economists who served on the special council came up with a list of tax increases to offset these reductions. State law requires a balanced budget, and spending is climbing again now that revenues are rising: The fiscal 2013 budget increases spending by more than $900 million. (State officials will tell you they had no choice about increases for education and Medicaid. Let’s say they’re right. The result — more spending — is the same even if it’s not voluntary.)
So, offsetting tax increases seem politically necessary. The biggest recommendation of the special council, at $463 million per year, was reapplying the state sales tax to groceries. It was summarily dismissed by Gov. Nathan Deal.
Two of the other large offsets were taxing person-to-person sales of used cars ($151 million) and ending an exclusion for certain retirement income ($272 million). But variations on those ideas are incorporated into HB 386, so we can’t count on them to help pay for future tax reform.
That leaves tax hikes on cigarettes, telecommunications and personal services such as auto repairs — all of which have been heavily lobbied against. Anyway, those three increases together would not offset a sizable cut in the income tax rate.
Failing that, we’d be left with an increase in the sales tax rate. And there are a number of legislators who say they want to shift the tax burden from income to consumption. But if the T-SPLOST they created passes this summer, boosting sales tax rates as high as 9 percent in Atlanta, don’t expect to see the state raise the rate by another penny or two.
All this leaves the state mightily restrained in its ability to make those income-tax cuts, which are important to the state’s future competitiveness. “Testimony given at Council meetings,” the special council reported in 2011, “indicates cutting personal income tax rates would be the most advantageous change Georgia could make to attract high-technology companies and jobs.”
Yet, HB 386 appears to put us even further from reaching that goal. Instead, we get a partial reduction of the “marriage penalty” that amounts to $120 or less per year for Georgia couples and is less important to most of them than a rate cut would be. That, and a renewal of the old back-to-school sales tax holiday that the special council described this way:
“Sales tax holidays appear to have no effect on consumption other than to change the timing of purchases and shift the mix of items” purchased. And while there may be some sales gained or lost along the borders of states that do have sales tax holidays, “there is no empirical evidence to suggest that holidays provide a material boost to a state’s economy.”
But it would take up another $32 million to $48 million a year that could have gone toward cutting income tax rates.
There are a couple of items in the reform that are clearly pro-growth. The best of these is the exemption from sales tax of energy used by manufacturers. No surrounding state charges that tax, and it helps both businesses new to Georgia (think Caterpillar) and our existing companies (think North Georgia textile mills).
But that change and a couple of other small ones could have been made alone, with less impact on the state budget, and without crimping our chances at truly comprehensive tax reform in the future.
– By Kyle Wingfield