As lawmakers have assembled in Atlanta for the 2007 legislative session, there is growing momentum for 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 in Georgia. Senate Finance Chairman Chip Rogers and House Ways and Means Chairman Larry O’Neal have already begun to hold hearings on the subject.
Tax reform in Georgia has two worthy goals: first, to reduce the tax burden – the percentage of total income taken by state and local taxes; and second, to increase the competitiveness of Georgia’s economy.
In 1970, when the Tax Foundation first started compiling statistics on tax burdens, Georgia was a low-tax state – ranking 43rd highest nationally. Today that is no longer the case.
By 2006, Georgia had jumped to 25th highest nationally with taxes eating up 10.4 percent of income. While this places the Peach State in the middle of the pack across the country, each one of Georgia’s neighbors except North Carolina has a lower tax burden. To make improvements, lawmakers have a number of options available, such as reducing the rates on 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. es, 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, or 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. es, possibly trimming them to the level of surrounding states.
But reducing the tax burden is only half the reform Georgia needs. Lawmakers are right to also focus on improving Georgia’s economic competitiveness. Recent Tax Foundation research reveals that states that increase their competitive edge through favorable business tax structures will attract new investments to the state and improve overall growth.
A helpful tool for evaluating the “business friendliness” of a state’s tax system is the State Business Tax Climate Index published by the Tax Foundation each year. The Index ranks all 50 states based on five objective areas that impact business: taxes on corporations, individual income taxes, sales taxes, unemployment insurance taxes, and taxes on wealth.
Georgia ranks a respectable 19th best in this year’s Index, but it can hardly rest on its laurels. Neighboring Florida has one of the most favorable business tax climates – ranking 5th best in this year’s Index. From 2000 to 2005, Florida saw a 32 percent increase is personal income, a 10 percent increase in employment, and a whopping 43 percent increase in gross state product. By comparison, Georgia’s gains were 22 percent, 6 percent, 25 percent respectively – again, landing Georgia in the middle of the pack.
No doubt Georgia will have a difficult time competing with Florida’s zero percent rate on personal income, but policy prescriptions based on sound principles of taxation will go a long way to help Georgia close the gap.
A good tax system should: remain simple and easy to comply with; avoid favoring some industries or groups of consumers over others; be plainly visible to taxpayers; and inhibit economic growth as little as possible.
Without laying a sound policy foundation, Georgia lawmakers could very well find themselves repeatedly repairing their tax system. A look at recent problems incurred by several states can help Georgia avoid the same pitfalls.
For instance, states with gross receipts taxA gross receipts tax is a tax applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. es – which encourage poor business decisions – are routinely (though unsuccessfully) tinkering and toying with their taxes. Lawmakers in Washington State have spent over seven decades revising tax rates for industries that suffer due to the inherent flaws in their tax structure.
And in Michigan, some politicians have adopted the position that any tax reform must not “shift” the tax burden from businesses to individuals. Though it sounds attractive, it denies economic reality. Businesses don’t pay business taxes any more than a plot of land pays property taxes. Ultimately, people have to pay. The result of this wrong-headed policy will likely be hidden taxes on consumers, employees, and investors.
There are powerful lessons to be learned from the experiences of other states and should help lawmakers navigate common traps when making policy. If lawmakers follow guidelines for sound tax policy, future tax reforms will make Georgia’s economy more competitive in the regional, national and international marketplace. In turn, the Peach State will be a better place to live, work and raise a family.
When seeking to reform Georgia’s tax code, the bottom line to creating a good tax system is very similar to what every good little league baseball coach tells their team: it all starts with the fundamentals.
Jonathan Williams is an economist and Chris Atkins is an attorney at the Tax Foundation.Share