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 is finally on the table for Georgia, and the House has done its part to make sure it happens, passing a reform bill yesterday. After news broke that Georgia is set to receive an extra $5.2 billion over five years as a result of federal tax reform, the state has moved quickly to use the revenue to change its own tax code. In previous years, Governor Nathan Deal (R) had been hesitant to support an overhaul of the state’s tax code, but this year, he’s supporting HB 918.
HB 918 makes several notable changes. The bill gradually reduces the top individual and 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 down from 6 percent to 5.5 percent by 2020. 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. s will also double for all taxpayers, up to $4,600 for single filers, $3,000 for married filing separately, and $6,000 for joint filers. The bill is estimated to cost about $5.7 billion over five years.
Georgia is surrounded by states with low or no individual income tax burdens, and this change will help boost the state’s competitiveness. Florida doesn’t levy an 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. , while Tennessee only taxes interest and dividend income at a rate of 3 percent. With North Carolina levying a rate of 5.499 percent and Alabama at 5 percent, the only neighboring state with a higher income tax rate than Georgia is South Carolina at 7 percent.
A state’s top income tax rate is generally associated with wealthy taxpayers, but in Georgia, the top rate kicks in at only $7,000 in income. That’s far below the state’s per capita income level of $42,159. This rate reduction, combined with the doubling of the standard deduction, will likely lower tax bills for most taxpayers in the state.
Lowering the individual income tax rate not only provides relief for individual taxpayers in Georgia, but for businesses, too. As I noted earlier this week, it’s important to remember that many businesses pay individual income taxes. These 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 tax. Lowering the rate would benefit both individual taxpayers and businesses in the state.
The reduction of the corporate income tax rate from 6 percent to 5.5 percent will also help the state compete for corporate investment. Florida, South Carolina, and North Carolina all levy a lower rate than Georgia, and North Carolina in particular is stiff competition – the state is recognized for its pro-growth tax code.
The Georgia bill passed the House on Thursday, 134 to 36. Similar legislation has previously passed in the Senate, and the governor supports the bill, so it doesn’t appear that it will face many obstacles before passage.
Sound tax policy is centered around the idea of broad bases and low rates, and the federal government has done the difficult work of broadening the base for states. Georgia is moving to do its part now to lower the rates. If the bill passes, Governor Deal and the Georgia legislature deserve credit for working to make the state more competitive, helping to attract new investment and provide tax relief across the state.Share