This week, Georgia was named 1st in Site Selection Magazine’s Business Climate Ranking. Some policymakers have used the occasion to celebrate, but unpacking the ranking shows that taxpayers shouldn’t be as quick to rejoice.
Site Selection’s ranking takes into account subjective and objective variables. Fifty percent of the ranking is determined by a survey of site selectors who indicate which states are the most business friendly. The other half of the ranking is determined by objective data, including variables from the Conway Projects Database (which credits areas with at least $1 million in capital investment, 20 or more new jobs, or new construction of at least 20,000 sq. ft.).
Some of the Site Selection variables are laudable goals that Georgia should be proud to score highly in, such as workforce skills, transportation infrastructure, workforce development, and quality of life. 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. Foundation’s own Location Matters is also weighted in the ranking.
Not included in the methodology of the ranking but mentioned at length in the article is our State Business Tax Climate Index, where unfortunately Georgia ranks in the bottom third of the country in 36th place.
On the state’s low ranking in our Index, Governor Nathan Deal commented,
“That’s something we hope to do something about,” says the governor. “Those are difficult for anyone to rank. If you look on the surface, states that don’t have an income tax would rank very high. But the reality is they make up for it with a lot of other types. Our 6 percent personal income tax rate roughly creates 50 percent of the revenue of the State of Georgia. Even though I am a Fair Tax proponent, when you are confronted with that reality, saying you will shift to a consumption-based 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. approach, there are several things to consider. One is sales tax is not as reliable on a sustained basis as income tax is.
“But if you look at it overall,” he adds, “we’ve balanced things very well. I don’t hear people thinking of moving their businesses here complaining about that. We’ve made other adjustments in terms of regulatory reforms, making it easier for them to get operational, and we have a lot of credits available for job creation and other purposes that really reduce the effective tax rate in the business category.”
It appears the governor takes competitiveness seriously, but there are a few quibbles here worth noting. First, consumption taxes (like the sales tax) are generally found to be less volatile than income taxes. Specific to Georgia, an analysis from The PEW Charitable Trusts indicates that the state’s 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. fluctuates within 7.2 percent of its average growth trend, while the sales tax only oscillates an average of 4.9 percent around its growth trend.
Secondly, while regulatory reform is likely a step in the right direction to attracting business, tax credits are not, and at best can only provide a temporary band-aid to an otherwise undesirable tax structure.
One particularly large 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. in Georgia is the film tax incentive program, designed to grow the state’s “Y’allywood” film industry. The program cost the state budget a pretty penny—to the tune of $925 million over a five-year period—and that kind of hole means rates on other business activity have to be higher to make budget ends meet. Research has shown that film tax credits are a net loss for states and generate less than 30 cents for every $1 of spending.
As a native Georgian, I know that the state has a lot of attractive qualities, many of which are highlighted in Site Selection’s ranking. However, tax structure still matters, and it is an area the state should be focusing on.
Georgia’s individual income tax still imposes a marriage penaltyA marriage penalty is when a household’s overall tax bill increases due to a couple marrying and filing taxes jointly. A marriage penalty typically occurs when two individuals with similar incomes marry; this is true for both high- and low-income couples. , taxes all forms of capital income, and is not indexed for 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. , which 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. . 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. rate is higher than most neighboring states, and faces competition as North Carolina lowers its rate to 3 percent next January (giving it the lowest corporate rate of any state that levies the tax).
Last year the Georgia Senate advanced a substantial tax overhaul that lowered tax rates and broadened tax bases, but the bill floundered in the House. This next coming session, policymakers have an opportunity to resume the tax reform conversation in earnest, and they should seize it.
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