The Blog

On the Docket: Fundamental Tax Reform in Georgia?

Posted on October 28, 2015

By: Jordy Berne

Months in advance of the next legislative session, attention is already turning to tax reform. Legislators typically pass a few tax bills every year, but substantial overhaul hasn’t happened since 2012. This year might be different though; a new tax overhaul bill was introduced last session that appears to have the support of many lawmakers. This bill, HB 445 or the “More Take Home Pay Act of 2015” (MTHPA), would fundamentally change the nature of taxation in Georgia, making it more consumption-based rather than income-based.

How Would MTHPA Affect Georgians?

Georgians pay individual income taxes to the state once every year on April 15th. The Georgia income tax currently has six brackets and a top rate of 6 percent. On the other hand, Georgians pay consumption taxes every day. Most visibly, Georgians pay sales taxes nearly every time they purchase goods and services. The state sales tax is currently 4 percent, but each county imposes a sales tax on top of the state’s.

Over the course of three years, MTHPA would raise the sales tax from 4 to 5 percent and replace the income tax brackets with a flat rate of 4 percent. These changes would put money in Georgians’ pockets on April 15th, but at a price. Ordinary expenses like groceries, clothing, and prescription drugs would become slightly more expensive. Plain Jane of Athens-Clarke County, who has a net income of $47,829, would save $766.58 on tax day. However, her weekly grocery bill would increase from $107 to $108. This change might seem minor, but the extra sales tax dollars would accumulate over a year.

What are the Advantages?

Proponents of the bill argue that Georgia needs a lower income tax to remain competitive with neighboring states. Florida doesn’t have an income tax, Tennessee only taxes interest and dividends, and Alabama’s income tax is lower than Georgia’s. Lower taxes would raise Georgia’s appeal as a place to do business and thereby attract small and medium-sized firms. New industry is an important driver of economic growth. Moreover, shifting toward more of a consumption tax would incentivize saving and investment, which can also spur long-run economic growth.

What are the Drawbacks?

MTHPA isn’t without pitfalls. First, sales taxes are regressive by nature, meaning they harm low-income families disproportionately. To understand this point, compare the spending habits of a low-income family to a high-income family. The low-income family will spend a larger percentage of its family budget on goods and services, while the high-income family will commit a larger percentage to savings. In 2014, the poorest 20 percent of all families in Georgia paid 6.8 percent of their incomes in sales taxes while the richest 1 percent paid only .8 percent. MTHPA would make Georgia’s already disproportionate sales tax burden even more regressive, hurting low-income families.

Opponents of the bill also worry that MTHPA will jeopardize Georgia’s high credit rating. Currently, Georgia has a perfect AAA rating, but Wall Street investors might be concerned that a reduction in the income tax would reduce revenues, putting the state at greater risk of defaulting on loans. If this were to happen, rating agencies might downgrade Georgia’s bonds. The state of Kansas provides a cautionary tale. Under Governor Brownback, Kansas abolished its income tax in 2013. Since then, Kansas has experienced growing deficits, higher interest rates, and a ratings downgrade. Adding insult to injury, the tax cut never produced the economic boost it was supposed to.

What’s Going to Happen?

As the next legislative session slowly approaches, the crystal ball on this bill remains cloudy. MTHPA does seem to be gaining traction though. The House Ways and Means Committee held its first hearing on the bill in August and will likely hold several more during the offseason. Many changes in the bill are expected before it is ultimately voted on. Perhaps the only certainty is that tax policy will be a contentious issue in the Assembly next year. MTHPA will surely be at the forefront of those debates.