The Georgia House of Representatives recently passed a bill that would dramatically improve the state’s income tax. The new bill moves the state away from a progressive income tax system to a single-rate flat tax. Georgia’s current income tax divides Georgians into six different tax brackets, starting at 1 percent and maxing out at 6 percent, depending on individual income levels.
The new bill will make Georgians pay a flat income tax rate of 5.4 percent. To limit the effect of the tax on lower-income Georgians, the bill also gives an earned income tax credit to low-income individuals, which allows up to 10 percent of the federal credit to be applied to the state income tax. If passed, the new flat tax would go into effect January 1, 2018. This is the second attempt in the last year to enact a flat tax in the Peach State. The Georgia Senate approved legislation in 2016 to cut the top tax rate from 6 percent to 5.4 percent, but the bill did not make it out of the House.
Flat taxes are beneficial for several reasons. They avoid penalizing the citizens who produce the majority of jobs and economic activity with higher tax rates. Flat taxes simplify the tax code by eliminating credits, exemptions, and deductions, taxpayers will no longer need to hire expensive tax accountants or use expensive computer programs to file their state taxes. While main critics of flat taxes argue they represent a tax cut for the rich, even under a flat tax, those who earn higher incomes pay more in taxes, achieving the “social justice” progressive tax proponents claim to seek.
Personal and corporate income taxes are generally considered to be the most destructive taxes because they disincentivize production, innovation, and risk-taking. Recent studies have shown states with no income tax or with lower income taxes perform better economically and achieve greater job and population growth than those with higher income taxes. High income taxes deter economic development by discouraging higher-income-earners and new capital from moving into a state, remaining there, or investing their money. A study by the Americans for Tax Reform Foundation found, “Each positive 1 percentage point tax burden differential between states decreases the ratio of income migration into the high-tax state by 6.78 percent in a given year.
Tax revenues are more volatile under progressive tax systems than with flat taxes, making budgeting more difficult. Relying on a small percentage of higher-income taxpayers for a larger percentage of revenues generates revenue windfalls and spending free-for-alls during economic booms, followed by massive budget gaps during economic recessions.
Kelly McCutchen, president of the Georgia Public Policy Foundation (GPPF), says although more needs to be done, the flat tax is a good first step. “This pro-growth reform will be a boon to small businesses and entrepreneurs, foster job creation and put us in a position to take another major tax reform step in the near future,” wrote McCutchen in the Athens Banner-Herald.
GPPF notes the new tax rate would move Georgia’s rate below that of seven states, including neighboring North Carolina.
Sound tax reform should adhere to four basic principles, argues John Nothdurft of The Heartland Institute: Taxes should be applied to a broad base, kept at a competitive and low rate, be open and transparent to taxpayers, and not distort the economic choices of consumers and businesses.
Georgia should continue to implement tax reforms that lower rates, put dollars back into the pockets of taxpayers, and tighten the state’s budget by creating new, reasonable limits on spending. Eliminating income taxes altogether should be every state’s ultimate goal, as no tax is more disruptive to economic growth.
The proposed flat tax is a clear step toward simplifying the state’s tax code and keeping the state competitive with its neighbors.
The following documents examine the flat tax and income taxes in greater detail.
A Brief Guide to the Flat Tax
https://heartland.org/publications-resources/publications/a-brief-guide-to-the-flat-tax-1?source=policybot
Everything you wanted to know about the flat tax is provided in this PolicyFax by Dan Mitchell of The Heritage Foundation. Mitchell says the flat tax eliminates special-interest favoritism and prevents taxpayers from finding tax loopholes by hiring an army of lawyers, accountants, and lobbyists.
Ten Principles of State Fiscal Policy
https://heartland.org/publications-resources/publications/ten-principles-of-state-fiscal-policy?source=policybot
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
What Are Flat Taxes?
http://taxfoundation.org/blog/what-are-flat-taxes
Kyle Pomerleau of the Tax Foundation examines flat taxes and explains how different flat tax proposals work.
State Individual Income Tax Rates and Brackets for 2016
http://taxfoundation.org/article/state-individual-income-tax-rates-and-brackets-2016
Nicole Kaeding of the Tax Foundation analyzes the most up-to-date data available on state individual income tax rates, brackets, standard deductions, and personal exemptions for both single and joint filers.
Rich States, Poor States
http://www.alec.org/publications/rich-states-poor-states/
The ninth edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams offers both individual-state and comparative accounts of the negative effects of income taxes.
Institute Brief—No Income Tax: The Key to Economic Growth
http://heartland.org/policy-documents/institute-brief-no-income-tax-key-economic-growth
The Public Interest Institute examines how states with no income tax are doing compared to those with income taxes: “Studies show that states without an income tax have greater economic growth rates than states with an income tax, including greater rates of income growth, population growth, and job growth, and are more attractive to businesses looking for locations to build or expand.”
The Effect of Progressive Tax Codes
https://heartland.org/publications-resources/publications/the-effect-of-progressive-tax-codes?source=policybot
Bill Ahern of the Tax Foundation discusses the effects of different kinds of progressive taxes on taxpayers and the economy.
State Budget Reform Toolkit
https://heartland.org/publications-resources/publications/state-budget-reform-toolkit?source=policybot
The American Legislative Exchange Council outlines a set of budget and procurement best practices to guide state policymakers as they work to solve the budget shortfalls. The toolkit will assist legislators in prioritizing and more efficiently delivering core government services by advancing free markets, limiting government, and promoting federalism and individual liberty.
The Historical Lessons of Lower Tax Rates
http://www.heritage.org/research/reports/2003/08/the-historical-lessons-of-lower-tax-rates
Examining the historical results of income tax cuts, Daniel Mitchell of the Heritage Foundation finds a distinct pattern throughout American history: When tax rates are reduced, the economy’s growth rate improves and living standards increase.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact John Nothdurft, Heartland’s director of government relations, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
