Picture this: It’s April 2016. Your income tax return is due. While you still have to pay the federal income tax, there is no longer a state income tax.
Sounds good, right?
Would you trade not having to pay Georgia’s income tax, which has a top rate of 6 percent, for a sales tax as high as 14.5 percent — more than double the current 7 percent sales tax rate in Bulloch County?
It could happen.
But, despite the idea’s growing popularity, the Georgia Budget and Policy Institute, a nonpartisan think tank based in Atlanta, urged caution in a report it issued last week. Such an exchange of taxes could actually hurt Georgia’s economy and lead to a higher tax burden on many businesses and lower- and middle-income individuals and families, the report says.
“One of core arguments made by the other side is that everyone comes out on top in the end because there is big economic boost from new jobs,” said Wesley Tharpe, a policy analyst for the institute and author of the report, called “Tax Shift Plan Threatens Georgia’s Future.” “We think that, based on the evidence, it’s highly unlikely those sorts of benefits would materialize.”
Three bills were filed during this year’s legislative session that would exchange income tax for a higher sales tax. All are alive and could be considered when lawmakers convene again under the Gold Dome in January.
State Sen. Jack Hill, R-Reidsville, has a lot of say in financial legislation as the Senate Appropriations Committee chairman. He takes a cautious view of the idea of eliminating income tax.
“I am cautious about considering massive changes to the tax structure that provides half of state revenue,” he said in an email response to a reporter’s query. “My question will be ‘where can we get the quickest, largest investment return for any reduction and how can essential services like education be maintained.’”
Sales tax not a boon in Ga.
Supporters of the idea say it will stimulate economic activity by cutting down on businesses’ tax burden. They point to several other states that do not have an income tax, such as Alaska and Texas, which weathered the Great Recession well in comparison to other parts of the country, including Georgia.
However, Tharpe points out, Alaska and Texas both have vast oil reserves that are a large source of revenue. Florida, another state without an income tax, has a large tourism industry. Georgia does not have such luxuries, Tharpe said.
House Bill 688, called the “Fair Taxation Act of 2014,” would repeal both the corporate and personal income taxes. Georgia’s 4 percent sales tax rate would change to “a percentage to be determined by the General Assembly,” according to the report.
Senate Resolutions 412 and 415 would work together to make the shift from income to sales tax over time. Resolution 415 would cap the current top income tax rate at 6 percent. Resolution 412 would only allow sales tax increases under two conditions: Local sales taxes could be raised through a public referendum on specific projects (as is currently the case), and the state sales tax would only be raised if the new revenue is used to decrease income tax rates, according to the report.
“Over time, lawmakers charged with meeting Georgia’s public needs would be forced to adopt higher sales taxes,” the report says. “Those new sales taxes automatically will trigger lower income taxes, permanently locking Georgia into static or declining levels of revenue.”
Tharpe said that shifting from income tax to a higher sales tax would raise taxes on up to 80 percent of Georgia individuals and families. Only those at the very highest income levels would see a tax reduction because they currently pay more in income taxes and less in sales taxes as a share of their income than do lower- and middle-income families.
That is because while basic goods and necessities cost the same for everyone, that cost takes up a larger share of a lower-income family’s resources compared to a family that makes more money.
More tax burden for businesses?
Also, contrary to the belief that businesses would benefit from no income tax and a higher sales tax, the vast majority of businesses actually would see their tax burden increase, Tharpe said.
That is because businesses, like individuals, have to buy supplies, which are subject to the sales tax.
“Companies’ sales tax bills would spike substantially and many could face higher property taxes as well,” the report says. “In Texas, for example, 65 percent of state and local taxes are paid by businesses, as opposed to an average of 48 percent nationwide.”
Also, the vast majority of businesses are small and have such small incomes that they wouldn’t notice the elimination of the income tax. Nine out of every 10 Georgia businesses would see no real tax cut at all because they don’t pay income tax. Less than 1 percent of businesses account for 87 percent of the state’s corporate income tax revenue. Those 1,655 businesses, therefore, would receive nearly all of the benefit of an income tax cut, the report says.
Georgia businesses paid a smaller share in state and local taxes than did businesses in 43 other states, the report says, citing a fiscal 2012 report by Ernst & Young and the Council on State Taxation.
If the sales tax is not raised high enough to offset the lost income tax revenue -- which the report says would have to be as high as 14.5 percent when local sales taxes are figured in with the state sales tax -- the state would either have to find new revenue sources or cut services. Those services include ones that businesses consider when deciding where to locate, the report says: education, health care and transportation (roads, mass transit and such resources as airports and the Port of Savannah).
Also, Tharpe said, sales tax is a less-stable revenue source than income tax. Sales tax revenues fall when people spend less, and how much consumers spend is largely dictated by how the economy overall is faring.
“Despite support from powerful out-of-state interests, tax shift plans are misguided roadmaps for change,” the report says. “Georgia’s lawmakers should ignore the siren’s call and firmly reject the fringe, copycat idea during its likely appearance in the 2014 legislative session that begins in January.”
Jason Wermers may be reached at (912) 489-9431.