Federal taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform has led to a revenue windfall for many states, leaving those states to decide how to manage the new funds. Some states have wisely opted to channel their new revenue into state-level tax reform, and it appears Georgia might follow suit with its $4.7 billion revenue windfall over the next five years.
Governor Nathan Deal (R), who has previously been hesitant about reforming the state’s tax system, is warming to the idea of modifying the tax system this session and is supporting HB 918, a bill that has now been reworked to double the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. and cut income tax rates, eventually reducing the top income tax rate to 5.5 percent by 2020.
Some legislators in the state, however, want a bolder approach. Representative Sam Teasley (R) has suggested the legislature look at lowering individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rates. He also suggested using last year’s House Bill 329, which lowered the top state income tax rate to 5.4 percent, as a starting point.
Ranking just 36th overall on our State Business Tax Climate Index, Georgia has room to improve in several areas of its tax code. Revenue constraints will factor into the legislature’s decisions, but the state certainly doesn’t lack options. Below are not the only options for the state, but a starting point toward better tax policy:
- A major corporate reform opportunity for Georgia is to couple to the new federal treatment of capital investment. Under the new federal law, purchases of short-lived capital assets can be expensed immediately instead of writing them off over a number of years. This is an immensely pro-growth feature of the federal code and would encourage investment in the state. This provision is, however, a front-loaded cost for states and temporary at the federal level, but the extra revenue can help offset the cost.
- Another area worth examining is Georgia’s individual income tax code. It ranks 42nd on our Index’s individual income tax subcomponent, signaling that there’s lots of room for changes.
- The state could consider inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. -adjusting its personal exemptions, standard deductions, and brackets, like the federal income tax code has done for decades. Failing to index the tax code for inflation leads to “bracket creepBracket creep occurs when inflation pushes taxpayers into higher income tax brackets or reduces the value of credits, deductions, and exemptions. Bracket creep results in an increase in income taxes without an increase in real income. Many tax provisions—both at the federal and state level—are adjusted for inflation. ,” where taxpayers are pushed into higher income tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. s due to inflation instead of an actual increase in income. Bracket creep ultimately results in a tax increase for some taxpayers, without any new legislation.
- The legislature should also consider lowering individual income tax rates. Lowering the rate would make Georgia more competitive with many of its neighbors. Neither Tennessee nor Florida tax income (Tennessee only taxes interest and dividend income, and the tax is being phased out), and both Alabama and North Carolina levy a lower rate than Georgia’s top 6 percent.
- Moving the state to a lower-rate, flat income tax would be a bold step in the right direction. Similar legislation has passed both the House and the Senate in recent years and some recent legislation has included an earned income tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. to help retain the tax code’s progressivity for low-income taxpayers. A lower-rate, flat income tax would have all the benefits of lowering the rate, but also automatically would inflation-adjust the code and mitigate the economic consequences of marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s.
It’s important to remember that businesses pay individual income taxes, too. Many businesses, including sole proprietorships, partnerships, and S corporationAn S corporation is a business entity which elects to pass business income and losses through to its shareholders. The shareholders are then responsible for paying individual income taxes on this income. Unlike subchapter C corporations, an S corporation (S corp) is not subject to the corporate income tax (CIT). s, are structured as pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. es, and pay taxes through the individual income tax code, not the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. . Lowering the rate would benefit both individual taxpayers and businesses in the state.
Legislators in my home state of Georgia have a lot to consider with $4.7 billion in new revenue, and they owe it to taxpayers in the state to at least consider a number of pro-growth tax reform opportunities.Share