Tuesday, the Georgia House of Representatives passed HB 949, a bill to consolidate the state’s six individual 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 into one, reduce the top rate from 5.75 percent to a new 5.375 percent flat rate, eliminate the Georgia itemized deductionItemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. for state income taxes paid, create a new 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. for individuals with incomes below a certain level, and increase the 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. credit for in-state adoptions.
This bill represents a continuation of the tax reform legislation enacted in 2018, which reduced the state’s 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. rate and top 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. rate from 6 to 5.75 percent for tax year 2019 and increased 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. . The 2018 legislation included two phased reductions in the income tax, meant to offset the broader state tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. created by conformity to the base-broadening provisions of the federal Tax Cuts and Jobs Act (TCJA). The second reduction requires a confirming vote of the legislature this year and was intended to bring both the top individual income tax rate and the corporate income tax rate down to 5.5 percent for tax year 2020. HB 949 replaces that second phased reduction with a broader set of reforms, resulting in a lower—and flat—individual income tax rate while keeping the corporate income tax at its 2019 rate of 5.75 percent.
Taken as a whole, the changes proposed in HB 949 would build upon the reforms enacted in 2018 by broadening the income tax base and moving to a single-rate individual income tax structure, making the state’s tax code more regionally and nationally competitive.
Of all the states with graduated-rate individual income tax structures, Georgia’s brackets are among the narrowest, with each rate applying to a very small amount of marginal income. Because Georgia’s top marginal rate of 5.75 percent kicks in at only $7,000 in taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. for single filers and $10,000 for married couples, most Georgia taxpayers have a great deal of income exposed to the top rate, even after accounting for the standard deduction and personal exemption. As such, Georgia’s individual income tax already functions much like a flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. , and the benefits of consolidating brackets and reducing the rate to 5.375 percent would be widespread across the income spectrum.
Source: Ga. Code Ann. §48-7-20(b); H.B. 949 (LC 43 1631S)
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In addition to consolidating brackets and lowering the individual income tax rate, this legislation would create a new, more generous progressive income tax credit for individuals with incomes below a certain level. Specifically, single filers with federal adjusted gross income (AGI) not exceeding $58,750 and married couples with AGI not exceeding $81,500 would be eligible to claim a nonrefundable credit of 0.375 percent of the amount by which their income falls below the applicable threshold, to be increased slightly according to the number of dependents claimed by the taxpayer.
This legislation would also broaden Georgia’s income tax base by eliminating a peculiar and circular deduction for state income tax liability, which currently runs in tandem with the federal state and local tax (SALT) deduction. Under Georgia law, a Georgia taxpayer who claims itemized deductions on his or her federal income tax return must also claim itemized deductions on his or her state income tax return. Because Georgia’s itemized deductions conform closely with the itemized deductions available under the federal tax code, any amount of Georgia income and property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es paid (up to the new $10,000 cap) that gets excluded when calculating federal taxable income is also excluded when calculating Georgia taxable income.
Most states include an addback for state income taxes, avoiding the unusual situation where estimated state income tax liability is a deduction against taxable income for determining state income tax liability. HB 949 would functionally turn the deduction, at the state level, into a deduction for local property taxes. Specifically, HB 949 would create an addback for Georgia income taxes paid, meaning itemizers could no longer deduct Georgia income taxes in arriving at taxable income, though they would benefit from the lower rate that it helps offset.
Finally, this bill would increase Georgia’s nonrefundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit. for adoptions of children in the state foster care system. Under current law, the credit is $2,000 per year per child, and while the credit is nonrefundable, unused amounts can be carried forward indefinitely until the adopted child reaches the age of 18. HB 949 would remove the carryforward provision but would increase the tax credit to $6,000 per year per child for the first five years after adoption, then maintain it at $2,000 per year thereafter until the adopted child turns 18.
Having passed the House, HB 949 now moves to the Senate. If enacted, this bill’s tax changes would take effect on January 1, 2021, making Georgia one of 10 states to tax wage income using a highly competitive single-rate structure.
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