Georgia Senate Approves Flat Tax

March 21, 2016

It began as a tax incentive for aquariums, but the Georgia Senate had bigger fish to fry. Last week, on a 35-17 vote, the state senate approved legislation that would replace the state’s current individual income tax schedule with a flat tax of 5.4 percent.

The state’s current individual income tax structure shows its age. A six bracket graduated rate tax, its top bracket kicks in at $7,000. The current bracket structure, with minor adjustments, dates to 1937. Of course, times have changed. These days, Georgia individual filers with taxable income less than $7,000 only responsible for about $1 million in collections. Filers with $7,000 or more in taxable income save $230—a decent sum—by having their first $7,000 exposed to lower rates.

As amended, Georgia HB 238 replaces the state’s six bracket income tax (with a top rate of 6.0 percent) with a single-rate tax of 5.4 percent, coupled with substantial increases in the standard deduction and personal exemption designed to offset the greater exposure of the first $7,000 in income to the top (now only) marginal rate. The bill would raise the standard deduction from $3,700 to $5,700, and from $7,400 to $11,400 for married taxpayers filing jointly.

In the process, the bill also eliminates Georgia’s marriage penalty. The state expands, but does not double, brackets for married couples filing jointly, meaning that a couple filing jointly can experience a higher effective tax rate than two similarly situated individuals filing separately. Provided that each spouse earns at least $7,000, those filing jointly pay about $108 more than those filing separately, a disparity eliminated by a flat tax.

The HB 238 substitute adopted by the Senate also completes the repeal of the state’s capital stock tax, called the Corporate Net Worth Tax. The tax only nets about $40 million each year, or 0.2 percent of state tax collections, but is highly non-neutral in its treatment of Georgia businesses, as it is imposed on value, not net income—that is, without regard to a company’s ability to pay.

The bill’s revised fiscal note (not available online; news coverage here) anticipates that the legislation would cost $286 million annually by 2020, about half a percent of the state budget and one percent of state tax collections. Georgia lawmakers enacted a $900 million tax increase package (on motor fuel and hotels) last year for transportation improvements, and with state revenues up for the fourth year in a row, some legislators think the state is due for a tax cut.

Senate Finance Committee Judson Hill, who authored the substitute, characterized the proposed tax cut as a “fiscally responsible, modest measure.” Although the bill passed the Senate handily, greater resistance is anticipated in the House, which would be required to affirm the new language offered by the Senate.

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A 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.

An income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets.

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.

Taxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income.