Issue Analysis: Analyzing Georgia’s Tax Reform Proposal
Starting Point: The Tax Council’s Final Report
When the Georgia Council on Tax Reform and Fairness submitted its final recommendations, the fiscal impact had not been fully calculated. Fiscal conservatives were concerned this was a large tax increase, even though the Tax Council emphasized its goal of making the proposal revenue-neutral. The intent of the Council was for lower tax rates to offset additional revenue.
When the final fiscal analysis was presented, it showed that an immediate reduction to an income tax rate of 4 percent would still result in excess revenues of almost $1 billion -- enough to reduce income tax rates to approximately 3.5 percent. With this knowledge, the Joint Committee was able to forgo several proposed new taxes and still provide for an income tax rate of 4.5 percent.
The Number One Goal: Economic Growth
The growth rate of per capita personal income in Georgia over the past decade is next to last in the nation. We obviously need something to give our economy a jolt. Economists tell us reducing income tax rates is the best policy solution to stagnant growth. This clearly works at the national level, but how about the state level? The Federal Reserve Bank study below is one of many studies showing that income tax rate reduction is a good policy for state tax reform.
In examining the impact of average tax rates and marginal tax rates on income growth over the period of 1961-1992, the Federal Reserve Bank of Atlanta concluded, “relative marginal tax rates have a statistically significant negative relationship with relative state growth.” It further found that state and local tax rates “have temporary growth effects that are stronger over shorter intervals and a permanent growth effect that does not die out over time.” The study states, “If growth is a policy objective, one should, at the very least, assess whether tax policies are out of line with other states. If long-term growth rates seem too low relative to other states, lowering aggregate state and local marginal tax rates is likely to have a positive effect on long-term growth rates. This likelihood is greater if the reduction in marginal tax rates is sustained rather than temporary.”
Changes in the personal income tax also impact small businesses. Ninety-three percent of small businesses are organized as “pass through” or “flow through” entities – sole proprietorships, partnerships, Limited Liability Companies (LLCs) or Sub-Chapter S corporations. These entities are not subject to state or federal corporate income taxes; their net income is passed along to the owners who pay personal income tax on that income.
These businesses produce over half of the business net income in the nation.This means that a reduction in the personal income tax rate is a tax cut for entrepreneurs and the majority of small businesses in Georgia. In fact, many of the taxpayers who appear “rich” are in fact small business owners recognizing a one-time windfall of revenue from selling their business. This is often the nest egg that will provide for their retirement. There are many anecdotes of small businesses moving to Florida just before their sale to avoid Georgia’s 6 percent income tax rate.
Many recommendations from the Tax Council’s original plan have been removed in the final proposal, but the most important part – the reduction in the personal income tax rate – remains.