The Richardson Tax Rewrite

The Wall Street Journal’s Political Diary [subscription only] provides a piece today on the Speaker’s tax plan. I’m all in favor of tax reform and if Arthur Laffer is for it, I am inclined to be. However, it might just be too tough a sell. From the Politicay Diary:

Under the plan, all state and local property taxes would be eliminated. So would the estate tax, unemployment insurance and worker’s compensation taxes, business and occupational fees, intangible taxes and insurance taxes. The entire structure would be replaced with a flat rate income tax of 5.75% and a flat 5.75% sales tax. The state’s income tax is currently 6% and the sales tax is 4.5%.

The architect of the plan is the famous Reagan economist Arthur Laffer. “This would bring the focus of the entire country on Georgia,” Mr. Laffer said in an interview. “States compete; they’re like puppies bouncing around in a box at a pet store to get noticed. This is a way for Georgia to get noticed and set itself apart from all the rest of the states when it tries to sell itself to businesses and families.”

46 comments

  1. Doug Deal says:

    This could be a good test to see if the transition for something like the National Retail Sales Tax would be painful.

    An example. As I understand it, rent would then be taxed. So, with property taxes and bussiness/occupation taxes eliminated, the landlord would have a lower expense for the property, but the tenant would have to pay sales tax on the lease. The landlord already pays income taxes.

    So, does this mean that landlords will rewrite leases due to the new tax structure? If not, all renters would have their rent shoot up 5.75 percent, as it is currently an untaxed service.

    My only problem with things like the NRST and this Georgia tax are the transitional periods where a whole lot of chaos can break loose.

  2. If we’re going to have unemployment insurance, shouldn’t like the businesses/employees who are covered by it be the ones that pay it?

    Why would you want to roll what is essentially a fee into the broader tax structure?

    Should we eliminate hunting licenses and just roll that in to a sales tax increase also? Doug inadvertently makes a good point — how can income go down and sales only go up by 1% and still replace all those other taxes? Why, what we tax (for example rent) will be going way up.

    Hopefully, Georgia’s voters are smart enough to figure out this simple equation:

    If Government Revenue Remains Neutral
    And the Wealthy Pay Less Taxes
    The Non Wealthy Pay __________

    Despite what the Fairtaxers etc will tell you the answer is not less taxes.

  3. John Galt says:

    It’s important to remember that the Richardson plan in no way resembles the FairTax proposed by Cong. Linder.

    The FairTax replaces the income tax code, including employment (FICA) taxes; the Richardson plan adds on a retail sales tax to a lower income tax.

  4. griftdrift says:

    “If we’re going to have unemployment insurance, shouldn’t like the businesses/employees who are covered by it be the ones that pay it?”

    Ummm, they already do. If necessary, really boring, wonky explanation can be provided.

  5. Doug Deal says:

    JG,

    It resembles it in the important way that I mention. It will cause havok with the way things are currently billed, and will be a good mini-test to see how the economy responds.

    And Drift,

    He means under the new plan it is not. Currently it is “paid by the employer”, but under the new plan it is eliminated.

    Personally, I think the unemployment tax should be voluntary. If you want it, check a box on your w-4, and the premium can be deducted out of your check.

    There is no need to be overly paranoid about people making comparisons between the two.

  6. griftdrift says:

    I admit I didn’t read the full article. But just to be clear, currently unemployment insurance tax is completely 100% segregated from the general fund. Is this saying it wouldn’t be? I don’t think that’s possible since it is federally regulated.

    One of the great misconceptions is DOL is just like any other state agency. It is not.

    And Doug we could probably have a great debate about whether it should be mandatory or not, but I will say it is one of the least burdensome taxes with the highest benefit for both parties out there.

  7. griftdrift says:

    Oh I see. I inadvertently pass over that in the clip Erick posted.

    Anyway, I seriously doubt this is possible, if you would like I can explain why.

  8. Doug Deal says:

    grift,

    It is a maximum of about $250 a week, which amounts to about $13,000 on a yearly basis, for a maximum of 6 months ($6,500).

    That amounts to a full time job making $6.50/hr, for six months. I would rather have the extra few hundred and take my chances.

  9. griftdrift says:

    Also due to tax reform by Commissioner Thurmond and the legislature several years ago, the vast majority of employers and thereby their employees are currently paying near zero if not zero. That probably will not change unless we have a disastrous recession.

  10. CobbGOPer says:

    How exactly does this plan distinguish us? Florida has no income tax at all, as with Texas and a couple others (I forget which). How exactly does having a sales tax and an income tax (albeit a flat, fixed income tax) differentiate Georgia in the eyes of businesses?

    Screw the flat tax. Let’s study Florida and Texas and see how their systems work, and implement something along those lines. Eliminate the income tax (and flat tax, and any other required income tax) completely and then we have something to talk about.

    But of course, what will happen is they’ll talk and talk, and nothing will get done because no one wants to be holding the bag on this while they’re trying to run for governor at the same time. They’ll talk a big game and make big promises, but don’t expect anything concrete to happen anytime soon. Especially not with Sonny “Read my Lips…” Perdue still in office.

  11. griftdrift says:

    Tennessee is probably the other one your are thinking of CobbGOPer.

    As for how they do it?

    Well I can’t speak to Tennessee and Texas, but with Florida it is made up with higher sales tax, higher property taxes and a litany of impact fees.

    For a real world example, my brother recently built a new house in central Florida. He paid over $12,000 in permits and impact fees before he ever broke ground.

  12. buckmckenzie says:

    I wonder if it’s ‘fair’ to compare GA with FL or TX? Don’t they have additional streams of revenue unavailable in GA? Huge tourist dollars in Florida and oil dollars in Texas, for instance???

    Either way, I don’t see any major tax overhaul in GA. Just witness this past session and you quickly realize how little gets accomplished. Besides, no one will want to stake their political career to the implemenation of such a plan. Just dangle it out there to demonstrate your haterd of taxes, but don’t be so foolish as to actually carry it out.

  13. IndyInjun says:

    The legislation can be found here…..

    http://www.legis.ga.gov/legis/2007_08/fulltext/hr900.htm

    Actually it is a VAT, not a sales tax.

    The bill as introduced can be summed up as a trial balloon, not a workable tax system.

    Doug Deal – unlike the federal Fair?????tax con job, primary rents for individuals are exempt.

    John Galt – You are correct. The Georgia Fair Tax is radically different than the Linder nuttiness and would be nearly impossible to reconcile, so calling Georgia a proving ground for the “Fair?????”tax is a joke.

    CobbGoper – At least this eliminates the hated property tax.

    Florida, Tennessee and others with no income tax BROADLY impose sales tax on business goods and services, which is diametrically opposed to the federal “fair????tax” proposed by Linder. Their property taxes are sky-high too.

    Even with these broad sales taxes at about 9% rates have not raised enough revenue for Texas who imposed an ADDITIONAL gross receipts tax on business this year.

    Also noted is that this GA fair tax eliminates local sales taxes, BUT provides for special tax districts with separate tax rates.

    It is an interesting concept. I like the elimination of the ad valorem taxes.

    It is just that, a concept.There are far too many missing elements to think that it is remotely workable.

  14. bigdel1 says:

    Will this impact the existing tax credits/sales tax exemptions? If it wipes them out, every lobbyist (and their legislator friends) will scream bloody murder and not let it pass.

    Also, Georgia isn’t the only state desperately seeking attention in tax reform. MO is also looking at no income tax–very unlikely it will happen. TN experiences big swings in income and charges a 7% (state portion only) sales tax. FL, AL, and TX don’t have income taxes, but all have other revenue sources that aren’t present in GA (namely big-time tourism and oil.)

  15. CobbGOPer says:

    So Indy, basically you’re telling me that it doesn’t matter what type of tax system we impose, everyone is going to get screwed one way or another?

    Actually, that sounds like the most rational explanation…

  16. Federalist says:

    All of these flat/fair taxes are garbage. Tell me I am wrong; you have the right to disagree. I hate paying taxes just as much as the next guy, what can I say…like every other American I expect things just to be given to me. I think that sales taxes are an unjust burden on the market though.

  17. IndyInjun says:

    CobbGOPer:

    The late country comedian, Jerry Clower, said something that applies as well to Politicians and “Tax Reform” as it does doctors and a certain unpleasant procedure.

    He said, upon visiting a doctor….”IF you even remotely THINK you heard the word “p-r-o-c-t-o”, gathter yo’ split-tailed hospital gown around you and go hide in the nearest swamp!”

    When the pols start talking tax reform, we must strive to recall exactly who it was who fouled the tax system up to begin with.

  18. Doug Deal says:

    IndyInjun,

    Of course expecting you to read, or should I say understand, my comments is too much to ask. The similarity is that it will require a drastic change in the way many things are billed. Whether it is exactly the same change is irrelevant.

  19. Bull Moose says:

    I’m inclined to support it.

    The idea of a flat and fair tax is the way to go!

    While we’re at it. We need to address infrastructure costs too. Georgia should allow communities to adopt SPLOST on a 5/10/15/30 year scale if they so desire so that they can address needed transportation and infrastructure needs.

    A smart community would realize that they can pass the SPLOST for 30 years and address nearly all of their transportation problems within a 10 year window due to the borrowing power of the commitment.

    Georgia should look at that as a way to address the burdens of the decaying roads and infrastructure or else that’s going to be a hefty drag on state tax dollars as well.

  20. IndyInjun says:

    Doug,

    You made an excellent point that I failed to address.

    Departing from the commonality that exists with other state sales tax systems will prove problematic and it is just one of many complications, as you suggest.

  21. What I don’t understand is this: I pay about $2,000 a year in property taxes. Under Richardson’s proposal I wouldn’t pay that anymore. My income tax rate would also go down 0.25% (or maybe not, depending on the rate structure and if it is truly flat).

    And finally sales taxes would go up 1.25%. To make up for the $2,000 in property taxes I won’t be paying, I’ll need to spend $160,000 every year ($160,000 * 1.25% = $2,000). I hate to tell Glenn this but I don’t make that much money.

    Something stinks in this proposal, we’ve seen record increases in the size of the budget since Republicans took over this state…tax shift or reform just means tax increase to them, but I can’t quite figure out how they plan to do it. Must be tons of hidden fees and newly taxed items.

  22. Demonbeck says:

    Looking at the sales tax alone, in FY07 the OPB estimates Georgia will receive $5.926 billion in FY07 from the statewide 4.5% sales tax.

    With a 5.75% sales tax, that number would increase more than $1.6 billion to $7.572 billion.

  23. IndyInjun says:

    It would be very interesting to know exactly how much input that the Department of Revenue had in the drafting of the legislation.

    Chris HC, please consider that the 5.75% VAT will apply to SERVICES, unlike the current sales tax.

    Hmmmmmm…..like the Boortz/Linder creation, it will probably apply to employer-paid health insurance premiums.

    Tax reform is one of those appealing concepts that tugs at the interest of voters, while they overlook that SPENDING is the real problem.

  24. IndyInjun says:

    Demonbeck:

    As it now stands, all local sales taxes are also repealed and replaced by the 5.75% VAT, so it is replacing a 7% tax on goods only in most counties.

    Of course there is a provision for special tax districts that are included to mollify the locals.

  25. Doug Deal says:

    Indy,

    Thanks. That was my real point, the difficulties that would ensue in changing systems, not the similarities, dissimilarities of the proposals.

  26. IndyInjun says:

    Chris:

    There are very few services currently taxed under Georgia Sales/Use tax, as long as they are seperately stated on an invoice.

    Under the Georgia Fair tax, ALL services are taxed.

  27. IndyInjun says:

    From the legislation introduced:

    “The General Assembly shall provide by general law for a comprehensive flat tax which shall be known as the fair tax. Such tax shall replace the state income tax laws of this state and shall consist of a personal income tax at the initial rate of 5.75 percent and a business VALUE ADDED TAX at the initial rate of 5.75 percent. Such initial tax rates may be increased or reduced as determined by general law.”

    The tax would apply to goods and services.

    I have a LOT of questions about its application to real estate.

  28. Cracker says:

    IndyInjun you’re right, there are many questions hanging over this legislation.

    I would think a new tax on services would qualify as most likely the largest tax increase the state has ever incurred.

    Taxing services from HVAC services to visiting the Doctor’s office to mechanics on your auto will have to be passed onto the consumer causing some inflation. Sure we do away with one type of tax but it is off set by another.

    5.75% new tax on services should also meet stiff opposition from service providers that never had to pay the state tax coffers before.

  29. Redcatcher says:

    It is possible that the amount of economic activity that could come to the state would offset many of the drawbacks. Georgia could become a strong business force in the US.

    I would like to think that if done right. This one issue could have a impact on the future of Georgia like nothing else ever has.

  30. Erick says:

    Redcather, good point. People tend to forget that something like this could spur enough economic generation to offset losses.

  31. IndyInjun says:

    Erick:

    People tend to remember to be suspicious of politicians bearing gifts, especially when their record is one of financial profligacy at the expense of the citizenry.

    As far as ‘economic generation’ someone best figure out how the tax collection mechanism is to work under this scheme. Also, I don’t see exemptions for exported goods and services, definitions of “taxable income,” whether sales of real property are “personal income”, and how or whether capital gains are “income.”

    Without more fleshing out of what is a legitimate deduction, this would seem to be a gargantuan tax increase.

    The Devil is in the details and the details are invisible.

    Somebody has a LOT of explaining to do.

  32. Chris says:

    I’m not keen on the idea of a VAT – there is a reason Linder’s FairTax is a National Retail Sales Tax (NRST) and not a VAT.

  33. CHelf says:

    I would hope that there would be many more Kia plants to offset all of the other businesses actually LEAVING the state.

  34. griftdrift says:

    I would hope there would be microloans starting small businesses to off set all the KIA plants leaving the state once their bribes and blackmail have expired.

  35. Harry says:

    To be competitive in attracting wealth-inducing incomes and businesses, Georgia needs to look at the no-income tax states. Not just Florida, Texas, Nevada, Alaska, and Wyoming – all of which perhaps have sources of revenue not available to us – but also Tennessee, Washington state, Utah, South Dakota, and New Hampshire.

  36. Harry says:

    2008 is the only opportunity for real tax and spending reform. If the GOP can’t get it done next year, then they will either lose one or both houses and of course Democrats will never shake the system. If the GOP does manage to win again, the leadership will believe themselves inoculated against the conservatives and libertarians and continue to go with the flow.

  37. IndyInjun says:

    Spending reform is more critical than tax reform.

    As far as Kia and manfacturers, a VAT would certainly not be viewed as helpful, as it is a tax on each successive stage of production, with VAT paid on inputs credited against current month tax liabilities. (Noted that this mechanism is not spelled out. To Georgia’s benefit would be that exported goods would bear the tax to be paid by ‘foreigners.’)

    Another complication is reciprocity with other states. Georgia and other states have reciprocity on sales/use tax, which prevents double taxation. How a VAT can possibly mesh is uncertain.

    I cannot imagine the Association County Commissioners of Georgia or Georgia Municipal association would be too happy because (1) control of revenues passes out of local hands entirely; (2) The local revenue fund distribution is static, guaranteeing a ratio of revenues at a baseline year, meaning that locals growing faster than the state will be hurt and (3) the locals have been leveraging the revenue streams from SPLOST, LOST, and ELOST, which are growing at different rates. While this bill allows them to continue this practice, they will justifiably be leery of the adequacy of the local revenue pot versus the revenues under local option sales taxes.

    Also, businessses have to keep an entirely new set of tax records that won’t be like the existing sales tax or income tax. The later piggy-backs off of the Internal Revenue Code.

    Countries that have a VAT generally restrict credits/refunds for VAT taxes paid on business direct inputs ONLY, with no VAT refunds for indirect costs. This bill makes no such distinction.

    This is an interesting concept and one that certainly has merit, yet the legislation is an airplane being designed in flight.

  38. rugby_fan says:

    Harry; the GAGOP is not going anywhere.

    I see no reason not to believe that an idealogical shift has occurred making the GOP what the Democrats were for 130 years.

  39. Redcatcher says:

    Look guys the state reps and senators are no different that the one in Washington. Once they get to Washington they realize they have just become members of the most exclusive countryclub in the world. When the state folks get to Atlanta they are members of the most exclusive countryclub in Georgia. When in power they love to spend money, but when out of power they harp on the other party for spending. It is a sad commentary. A politician is only interested in the next election and a statesman cares about the next generation. Alas we have no statesmen left.

  40. Demonbeck says:

    “they are members of the most exclusive countryclub in Georgia.”

    Maybe Martha Burke ought to run for state rep in Georgia.

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