More on the Speaker’s tax plan

Last week, Speaker Richardson spoke at a meeting of the Georgia chapter of Americans for Prosperity. He came to pitch is tax reform proposal which he dubs the GREAT plan – Georgia Repealing Every Ad-Valorem Tax.

[updated to add:] I want to offer Kudos to the Speaker and the house for taking on such an ambitious project. While I’m not a fan of the current plan, they do deserve credit for trying to do something – which is more than could be said for our Republicans in Washington.

It has gone through several iterations since I started following the plan. The current version calls for a uniform state-wide 4% sales tax on goods and services, and the repeal of all property and ad-valorem taxes. This would include all local property taxes. Localities would be allowed to keep any existing SPLOTS, ELOTS, but otherwise would not be able to set their own sales tax rate.

The plan would make up the lost property tax revenues by eliminating all exemptions from the sales tax, and require service providers (doctors, lawyers, barbers and the guy who cuts your grass) to collect the 4% sales tax. My understanding is that this would then be revenue neutral.

So whats good about this plan?

Well, first off the state would stop taxing wealth without income. The Speaker made a big point about how unfair property taxes can be when you have a valuable property that isn’t generating any cash, and how the property tax bill can be a big surprise in the fall.

The plan would allow for a refundable credit for groceries and prescriptions. This would keep the no-exemptions rule in place while offering a break for needy families.

It would require all xLOSTs to pass with a 2/3rds majority on the referendum. This is good. What is really needed is legislation prohibiting counties from holding the xLOST referendums at odd times when turnout is significantly lower.

Finally, it would eliminate the 1200 plus different taxing entities a business has to file with. There would be one filing with the state thereby reducing the burden on small businesses. This is especially important when doing business on the Internet.

Whats wrong with the plan.

First off, in my opinion, is that it doesn’t lower or eliminate the income tax. In fact it will make tax filing that much more complex as you’ll have all these refundable credits to wonder if you qualify for. Earlier versions of the plan called for a 4% income tax cap, but I guess they decided those would be too politically difficult to pass.

A refundable tax credit on prescription drugs means that the Department of Revenue would start collecting data on what drugs you take. I’m not too keen on that privacy violation.

It implements double taxation on services. The service provider would have to collect and remit the 4% sales tax and they would pay the 5-6% state income tax on the same money.

Of all the taxes on the books, I think the property tax is the one people care the least about. Most people have their mortgage company escrow their property taxes so they are never hit will a surprise in the fall. The car tax is more unpopular and has popular support for a repeal.

Finally while mandating a statewide 4% sales tax would help curb tax abuse by big spending municipal governments, it would also prevent fiscally responsible counties and cities from lowering their sales tax rates to attract business, shoppers and residents. While this doesn’t violate the concept of Federalism per say, it does fly in the face of the concept of local control and the ability to experiment in public policy.

The biggest objection to the plan – that the state house would get to decide how much money each county gets is incorrect in my opinion. While the state would collect the taxes, the money would be earmarked as belonging to a specific county based on where the sale took place. The only issue would be if our Democratic Governor decided not to deposit the checks
for political reasons.

6 comments

  1. IndyInjun says:

    Chris F. – The property taxes have exploded with rapidly inflating real estate taxes, putting a serious squeeze on homeowners across Georgia, so this is politically very attractive.

    However, the tax base for the LOSTs is likely to be the same as for the state sales tax, as it si now, so we are likely looking at a new 7% tax on services, including medical care exploding at double digit rates.

    As there are no exemptions, the locals will be paying additional STATE taxes on their purchases. At the same time the locals have to depend on the state to accurately track and distribute the money based on an allocation set in time. The locals remember the early 90’s blow up over inaccurate distribution and are unlikely to trust the State with 100% of their revenue stream. Also, the locals know that they are being shortchanged presently, yet the state won’t allow them to audit DOR or even spot-check the returns of large retailers within their jurisdictions.

    If the locals are seeing accelerating growth, they will not be able to achieve more tax revenues at a time that their costs are exploding.

    On the flip side, if the state and local tax bases are the same, this deal would mean that the $20 billion estimated unfunded liability for retiree/employee health care would require the state to pay the 3% local tax in most areas, meaning that the the unfunded liability would grow by $600 million.

    On the other hand, if the bases are the same, the locals will gain tax revenue on services.

    The political dynamics with the local and the state are just wacko under the “GREAT” plan.

    As far as being revenue neutral, one hopes that they are not counting on service providers now working on a cash basis to avoid income tax suddenly becoming honest and paying sales tax.

    The other ominous aspect is that the state DOR already has very onerous requirements for individuals under use tax that are currently unenforced, including the power to estimate the use tax if the taxpayer did not keep receipts.

    Wanna bet that the state revenue auditors keep the current hands-off approach, if a sales tax becomes the principle method of funding state and local governments?

  2. Harry says:

    It would be so much simpler and competitive with other states to just reduce the state income tax rate.

  3. Bull Moose says:

    A for effort but I do not support the Speaker’s Sham Plan. It reminds me of when Guy Millner tried to eliminate the ad valorum taxes on cars.

    As well, I do not like the idea of cities and counties being dependent upon lawmakers in Atlanta for all of their funding.

  4. dorian says:

    The state house would get to decide how much each county gets, just by virtue of the plan. They will set the tax rate, and they will forbid the counties from collecting taxes. They will also eliminate bonds as funding sources.

    Personally, I can’t wait to file my ‘use’ tax return each year. I guess if it turns out I am not spending enough, the state will decide how much I should be spending and tax me accordingly. Maybe they will attach this bill to the 30/gal gasoline tax. I would hate for them to think that they are leaving us with anything.

  5. eburke says:

    I would prefer the Speaker put his energies toward cutting State spending and eliminating the State income tax. It is easy to reform someone else’s spending habits (local government) and ignore the ones you have direct cotrol over. We can deal with our County Commissioners if they get out of line but the State of Georgia is beyond the reach of the public already and now we are proposing to give the General Assembly discretion over local taxation and spending as well.

  6. IndyInjun says:

    Dorian,

    You touched on one very good reason, aside from the disincentive on customers to consume their services, that service providers who never have had to file sales/use tax returns now would have to file them MONTHLY.
    Property tax returns on real property do not have to be filed and if they are filed are only filed annually.

    Tax accountants will see an huge upswell in biz, so that THEY won’t mind having to file monthly returns.

    eburke – You are also right. I do not know of any state that has replaced property tax with a sales tax, but several have replaced the income tax with sales tax.

    At least two of these states, Texas and Tennessee have had huge financial strains from total reliance on sales taxes, with Texas imposing a broad gross receipts tax in addition to the sales tax.

    The latter fact should give the GA legislature pause.

    Cut spending and the tax collection device is secondary.

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