It began as a 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. incentive for aquariums, but the Georgia Senate had bigger fish to fry. Last week, on a 35-17 vote, the state senate approved legislation that would replace the state’s current 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. schedule with 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. of 5.4 percent.
The state’s current individual income tax structure shows its age. A six bracket graduated rate tax, its top bracket kicks in at $7,000. The current bracket structure, with minor adjustments, dates to 1937. Of course, times have changed. These days, Georgia individual filers with 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. less than $7,000 only responsible for about $1 million in collections. Filers with $7,000 or more in taxable income save $230—a decent sum—by having their first $7,000 exposed to lower rates.
As amended, Georgia HB 238 replaces the state’s six bracket income tax (with a top rate of 6.0 percent) with a single-rate tax of 5.4 percent, coupled with substantial increases in 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. and personal exemption designed to offset the greater exposure of the first $7,000 in income to the top (now only) marginal rate. The bill would raise the standard deduction from $3,700 to $5,700, and from $7,400 to $11,400 for married taxpayers filing jointly.
In the process, the bill also eliminates Georgia’s 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. . The state expands, but does not double, brackets for married couples filing jointly, meaning that a couple filing jointly can experience a higher effective tax rate than two similarly situated individuals filing separately. Provided that each spouse earns at least $7,000, those filing jointly pay about $108 more than those filing separately, a disparity eliminated by a flat tax.
The HB 238 substitute adopted by the Senate also completes the repeal of the state’s capital stock tax, called the Corporate Net Worth Tax. The tax only nets about $40 million each year, or 0.2 percent of state tax collections, but is highly non-neutral in its treatment of Georgia businesses, as it is imposed on value, not net income—that is, without regard to a company’s ability to pay.
The bill’s revised fiscal note (not available online; news coverage here) anticipates that the legislation would cost $286 million annually by 2020, about half a percent of the state budget and one percent of state tax collections. Georgia lawmakers enacted a $900 million tax increase package (on motor fuel and hotels) last year for transportation improvements, and with state revenues up for the fourth year in a row, some legislators think the state is due for a tax cut.
Senate Finance Committee Judson Hill, who authored the substitute, characterized the proposed tax cut as a “fiscally responsible, modest measure.” Although the bill passed the Senate handily, greater resistance is anticipated in the House, which would be required to affirm the new language offered by the Senate.Share