Georgia Scores Well on Business Climate, But Taxes Are Still a Weak Link

November 3, 2016

This week, Georgia was named 1st in Site Selection Magazine’s Business Climate Ranking. Some policymakers have used the occasion to celebrate, but unpacking the ranking shows that taxpayers shouldn’t be as quick to rejoice.

Site Selection’s ranking takes into account subjective and objective variables. Fifty percent of the ranking is determined by a survey of site selectors who indicate which states are the most business friendly. The other half of the ranking is determined by objective data, including variables from the Conway Projects Database (which credits areas with at least $1 million in capital investment, 20 or more new jobs, or new construction of at least 20,000 sq. ft.).

Some of the Site Selection variables are laudable goals that Georgia should be proud to score highly in, such as workforce skills, transportation infrastructure, workforce development, and quality of life. Tax Foundation’s own Location Matters is also weighted in the ranking.

Not included in the methodology of the ranking but mentioned at length in the article is our State Business Tax Climate Index, where unfortunately Georgia ranks in the bottom third of the country in 36th place.

On the state’s low ranking in our Index, Governor Nathan Deal commented,

“That’s something we hope to do something about,” says the governor. “Those are difficult for anyone to rank. If you look on the surface, states that don’t have an income tax would rank very high. But the reality is they make up for it with a lot of other types. Our 6 percent personal income tax rate roughly creates 50 percent of the revenue of the State of Georgia. Even though I am a Fair Tax proponent, when you are confronted with that reality, saying you will shift to a consumption-based sales tax approach, there are several things to consider. One is sales tax is not as reliable on a sustained basis as income tax is.

“But if you look at it overall,” he adds, “we’ve balanced things very well. I don’t hear people thinking of moving their businesses here complaining about that. We’ve made other adjustments in terms of regulatory reforms, making it easier for them to get operational, and we have a lot of credits available for job creation and other purposes that really reduce the effective tax rate in the business category.”

It appears the governor takes competitiveness seriously, but there are a few quibbles here worth noting. First, consumption taxes (like the sales tax) are generally found to be less volatile than income taxes. Specific to Georgia, an analysis from The PEW Charitable Trusts indicates that the state’s individual income tax fluctuates within 7.2 percent of its average growth trend, while the sales tax only oscillates an average of 4.9 percent around its growth trend.

Secondly, while regulatory reform is likely a step in the right direction to attracting business, tax credits are not, and at best can only provide a temporary band-aid to an otherwise undesirable tax structure.

One particularly large tax credit in Georgia is the film tax incentive program, designed to grow the state’s “Y’allywood” film industry. The program cost the state budget a pretty penny—to the tune of $925 million over a five-year period—and that kind of hole means rates on other business activity have to be higher to make budget ends meet. Research has shown that film tax credits are a net loss for states and generate less than 30 cents for every $1 of spending.

As a native Georgian, I know that the state has a lot of attractive qualities, many of which are highlighted in Site Selection’s ranking. However, tax structure still matters, and it is an area the state should be focusing on.

Georgia’s individual income tax still imposes a marriage penalty, taxes all forms of capital income, and is not indexed for inflation, which leads to bracket creep. The corporate income tax rate is higher than most neighboring states, and faces competition as North Carolina lowers its rate to 3 percent next January (giving it the lowest corporate rate of any state that levies the tax).

Last year the Georgia Senate advanced a substantial tax overhaul that lowered tax rates and broadened tax bases, but the bill floundered in the House. This next coming session, policymakers have an opportunity to resume the tax reform conversation in earnest, and they should seize it.

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