In January, the Georgia Special Council on Tax Reform and Fairness for Georgians released an ambitious 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. restructuring proposal for the state. Aiming for a broad base and low rate, the proposal pushed for reducing the 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. over time to 4%, extending the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. to final retail sales across-the-board, consolidating various taxes on communications services into one tax with a common rate, and reducing 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. . On the negative side, the proposal advocated a cigarette tax increase, and the proposal was ambiguous over whether it was revenue-neutral or on net raised significant amounts of revenue in the first years of the plan. Revenue-neutral, they later confirmed.
Fast forward to this month, where the closing session of the Georgia Legislature is deciding which elements of the plan can be pushed through now. Here are the elements of the bill (HB 382) making its way through the committees and the floor:
- Consolidate the current six income tax bracketsA 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. (currently 1% to 6%) to a single rate of 4.5%. The current top 6% rate kicks in at $7,000, so this is a rate reduction for most taxpayers.
- Cap itemized deductions at $17,000, with a dollar-for-dollar phaseout of itemized deductions above a certain income threshold. 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 (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. option is eliminated, but replaced with a non-refundable credit of up to $150 for taxpayers earning less than $70,000. Generally, taxpayers under that threshold will see little change to their tax owed. Taxpayers can only itemize if they itemize on the federal return.
- Apply the sales tax to automobile resales.
- Apply the sales tax to auto repair services. The original plan extended the sales tax more broadly; this now reduces that expansion to one industry.
- Remove the sales tax on energy business inputs. This is an extremely positive step: the current sales tax on energy inputs is just passed on to final consumers in a hidden way, and distorts prices by leading to taxes on taxes.
- Consolidate communications taxes into one excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. of a combined state-local rate of 7%. This had been a recommendation by the reform council; satellite providers are excluded under the rationale that they do not use public rights-of-way.
- Altogether, the plan is revenue-neutral.
While much less ambitious than the reform plan, it contains positive reforms that would improve Georgia’s business tax climate. The new income tax structure would be a unique one among the states, and time will tell how best to fine-tune it in the future. The plan may provide a good framework to build on in future sessions.
We’ll keep you alerted as the proposal moves through the Georgia Legislature this week.
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