Georgia Income Tax Reform Would Improve Standing Among Neighbors, Country

March 8, 2022

This year’s state legislative sessions have been characterized by a focus on tax policy, with five states already enacting significant individual or corporate income tax reform. Lawmakers in Georgia aren’t interested in being left behind.

While HB 1437 was previously a placeholder bill, the sponsors have now shared their plan to consolidate Georgia’s six individual income tax brackets into one and lower the rate from 5.75 percent to 5.25 percent, effective in tax year 2024. The bill would also eliminate the standard deduction for all taxpayers, instead increasing the personal exemption from $2,700 to $12,000 for single filers, and from $3,700 to $24,000 for those married filing jointly.

The benefits of a flat, 5.25 percent income tax would be reflected in Georgia’s rank on our State Business Tax Climate Index, an annual comparison of the competitiveness of state tax structures. Currently, Georgia ranks 32nd overall among states, and 35th in the individual income tax component. If the changes proposed by HB 1437 were in place today, the state would rank 16th overall and 12th on the individual income tax—a significant improvement as the state leapfrogs many middle-of-the-pack states with graduated rate taxes and top rates of just below 6 percent.

Georgia faces stiff competition from its neighbors when it comes to the individual income tax. Tennessee and Florida both have no income tax at all, and Alabama and North Carolina levy low top rates of 5 percent and 4.99 percent respectively.

Beyond rate considerations, the shift from a progressive to a flat tax enhances the economic competitiveness of the tax and, based on the experiences of other states, serves as a bulwark against future rate increases. In a high-inflation era, it also solves a problem present in the current system. Currently, Georgia’s bracket thresholds are set dollar amounts which are not tied to inflation. This means that, as the actual dollar amount of incomes increases, more of that income falls into higher tax brackets, even if the taxpayer’s purchasing power remains the same. By eliminating bracket thresholds altogether in favor of lower rates, lawmakers would avoid an avenue of future unlegislated tax increases.

However, lawmakers could go even farther to protect Georgians from unintended tax increases. The personal exemption, which this bill adjusts, is also not indexed for inflation. This means that the worth of the exemption lowers in concert with the value of the dollar, exempting a smaller percentage of residents’ incomes as time goes on. At the same time lawmakers are adjusting the personal exemption they should consider indexing it for inflation.

Moving from a graduated tax to a flat tax also eliminates Georgia’s “marriage penalty.” Under the current system, bracket thresholds are not doubled between single filers and those filing jointly, so married filers see more of their income subjected to higher rates than single filers do. Because the flat tax takes away those brackets completely, and because the bill makes sure the standard deduction is doubled for joint filers, the proposed bill eliminates the marriage penalty.

If HB 1437 were enacted, the changes would cost the state approximately $1 billion a year. This is no small amount, but Georgia’s state economist projects that state revenues will increase by at least $1 billion a year between FY 2023 and FY 2027. Between fiscal years 2019 and 2021, total tax collections grew by over 10 percent, and income tax collections grew almost 17 percent. The state is also sitting on a large surplus, although some of it is from one-time, rather than recurring, revenues. Year-over-year revenue growth forecasts of $1 billion a year, however, provide Georgia more than enough room to cut taxes while still preserving substantial growth—more than $3 billion above baseline by FY 2027—for other governmental priorities. Even at a cost of $1 billion a year, the state’s budget is projected to grow substantially, with lawmakers simply returning a portion of that growth back to taxpayers in the form of rate reductions.

In a time of increased mobility and tax competition, a lower rate and simpler tax structure would help Georgia stand out among states. Lawmakers would be wise to consider reforming the state’s income tax to improve the state’s competitiveness.

 


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A 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.

The 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.

A 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.

An 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.

A 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.