Commentary by Georgia Public Policy Foundation
March 9, 2011
Tax Reform Council Delivers a Promising Package
By E. Frank Stephenson
When Georgia’s Special Council on Tax Reform and Fairness released its recommendations on January 7, headline writers trumpeted the council’s proposal to eliminate the sales tax exemption for groceries. That proposal is but one part of a far-reaching reform that would enhance the state’s economic competitiveness and streamline Georgians’ taxes.
The council wisely began by adopting a set of “Guiding Principles.” These principles include creating a tax system that is more stable during changing macroeconomic conditions; does not distort individual behavior; is easy for taxpayers to understand and for the state to administer; levies roughly equal tax burdens on similarly situated taxpayers and, per the council’s mandate, is growth-enhancing. All are worthy goals.
Applying the guiding principles led the council to call for significant changes to Georgia’s sales, income and other taxes.
The personal and corporate income taxes would be phased down to a single rate of 4 percent. Marginal tax rates affect economic behavior, so this reduction should foster more commercial activity, especially because many small businesses are taxed at personal income tax rates.
The council also proposes that existing credits, exemptions and deductions be largely eliminated. Only an exemption for dependents and a low income credit would remain. Federal adjusted gross income would become the starting point for Georgia’s income tax, thereby eliminating the page of additions and subtractions from tax returns. The resulting tax code should be simpler for both taxpayers and tax administrators.
Similarly, the council recommends ending many current sales tax exemptions, including groceries, and broadening the sales tax base to cover many untaxed personal services. These are all worthwhile suggestions. Many existing exemptions have no proven economic benefit and some appear to be sops to politically favored industries. Exempting groceries made sales tax revenue more volatile during economic downturns. (Both the proposed low income tax credit and the continued exemption of food purchased with food stamps would prevent the taxation of groceries from unduly burdening low income citizens.) And the base broadening modernizes the sales tax to reflect shifting consumption patterns over time.
The recommendations also call for avoiding taxing business inputs. Thus current exemptions for business inputs would remain and new exemptions would be created for energy used in manufacturing, mining and agriculture. This would make Georgia’s business climate more attractive and avoids the tax compounding that arises from taxing both inputs and outputs of firms with multi-stage production processes. These changes should also reduce businesses’ cost of tax compliance.
On gasoline taxation, the council calls for a straightforward cents-per-gallon gasoline levy to replace the current combination of 7.5 cents per gallon plus 3 percent of the selling price. Today’s odd structure makes it difficult to forecast available revenue for road construction and has the perverse effect of increasing gasoline taxes as gas prices rise. Regarding cigarette taxation, the council recommends a modest increase but correctly avoids a large hike that would spur Georgians to buy their smokes from neighboring states with lower taxes.
Past governors’ pet tax provisions did not escape the council’s examination. The council proposes eliminating both Gov. Barnes’ sales tax holidays and Gov. Perdue’s exemption for retirement income. The former merely shifts the timing of purchases while there is no proof of a positive economic impact arising from the latter.
The council also calls for eliminating many “economic development” credits that favor specific industries. It recommends that the General Assembly create a new economic development fund instead. The transparency and fixed dollar amount of the new fund would be an improvement over existing policy while recognizing that modern industrial recruiting often requires financial incentives in addition to a good overall business climate.
The recommendations do produce one cause for concern: The council calls for the broadening of the sales tax to become effective July 1, 2011, with the income tax reductions being phased in beginning January 1, 2012. The net effect appears to be a significant tax hike over the short run that diminishes somewhat as the income tax cuts are fully phased in. Immediately implementing all of the income tax cuts and adding a tax-expenditure limitation to the council’s recommendations would help reassure Georgians that these tax reforms are not a stealth tax increase.
Overall, the council has put forth a commendable plan that is pro-growth, less complicated and less riddled with special exemptions and credits. If implemented so it avoids a large tax increase, it will be an improvement over Georgia’s existing tax structure.
E. Frank Stephenson is chairman of the Economics Department at Berry College in Rome, Georgia, and is a senior fellow with the Georgia Public Policy Foundation, an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians.
Nothing written here is to be construed as necessarily reflecting the views of the Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.
© Georgia Public Policy Foundation (January 14, 2011). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.