Georgia Legislators Considering Changes to Income and Sales Taxes

In January, the Georgia Special Council on Tax Reform and Fairness for Georgians released an ambitious tax restructuring proposal for the state. Aiming for a broad base and low rate, the proposal pushed for reducing the individual income tax over time to 4%, extending the sales tax to final retail sales across-the-board, consolidating various taxes on communications services into one tax with a common rate, and reducing the corporate income tax. On the negative side, the proposal advocated a cigarette tax increase, and the proposal was ambiguous over whether it was revenue-neutral or on net raised significant amounts of revenue in the first years of the plan. Revenue-neutral, they later confirmed.

Fast forward to this month, where the closing session of the Georgia Legislature is deciding which elements of the plan can be pushed through now. Here are the elements of the bill (HB 382) making its way through the committees and the floor:

• Consolidate the current six income tax brackets (currently 1% to 6%) to a single rate of 4.5%. The current top 6% rate kicks in at $7,000, so this is a rate reduction for most taxpayers.
• Cap itemized deductions at $17,000, with a dollar-for-dollar phaseout of itemized deductions above a certain income threshold. The standard deduction option is eliminated, but replaced with a non-refundable credit of up to $150 for taxpayers earning less than $70,000. Generally, taxpayers under that threshold will see little change to their tax owed. Taxpayers can only itemize if they itemize on the federal return.
• Apply the sales tax to automobile resales.
• Apply the sales tax to auto repair services. The original plan extended the sales tax more broadly; this now reduces that expansion to one industry.
• Remove the sales tax on energy business inputs. This is an extremely positive step: the current sales tax on energy inputs is just passed on to final consumers in a hidden way, and distorts prices by leading to taxes on taxes.
• Consolidate communications taxes into one excise tax of a combined state-local rate of 7%. This had been a recommendation by the reform council; satellite providers are excluded under the rationale that they do not use public rights-of-way.
• Altogether, the plan is revenue-neutral.

While much less ambitious than the reform plan, it contains positive reforms that would improve Georgia’s business tax climate. The new income tax structure would be a unique one among the states, and time will tell how best to fine-tune it in the future. The plan may provide a good framework to build on in future sessions.

We’ll keep you alerted as the proposal moves through the Georgia Legislature this week.