As the legislature continues to examine Governor Deal’s proposed 2016 state budget and the Transportation Committees in the House and Senate try to figure out how to raise more than a billion dollars to maintain the state’s roads and bridges, there is a parallel discussion about eliminating waste, fraud and abuse, along with corporate giveaways. And while much of that discussion involves taking a line-by-line look at the budget, a related but less noticed area of examination is of the so-called tax expenditures the state makes each year.
What’s a tax expenditure?
Tax expenditures are provisions in the tax code that allow for special treatment of a source of income or a certain type of expense. Such treatment usually results in a reduction in tax liability for the taxpayer. In principle, these tax benefits could be provided by direct appropriation, thus these provisions are referred to as “expenditures”. They represent tax revenues that would have been otherwise generated if not for this preferential treatment in the tax code.
Like direct government expenditures, tax expenditures are an allocation of government revenue that are intended to achieve a particular policy outcome or generate some activity. The value of a tax expenditure can be thought of as representing the amount of money that would be needed in the budget to provide the same level of financial support in the form of a government grant instead of through the tax code. Tax expenditures are received by businesses and individual taxpayers and are present in all of Georgia’s major taxes, including the individual income tax, corporate income tax, and sales tax.
That description comes from the Georgia Tax Expenditure Report for FY2015. The report goes into considerable detail in its listing of tax revenue lost to the state via exemptions and deductions in the personal and corporate income taxes, the state sales tax, and several other smaller excise or special purpose taxes.
There is a lot of foregone revenue simply because the state largely uses the same exemptions and deductions individual taxpayers receive on their federal 1040 tax returns. The deduction for employer paid healthcare is just over $1 billion. Another $199 million comes from the exclusion of capital gains upon the sale of a primary residence. Eliminating just three deductions taken from Schedule A–property tax paid, mortgage interest, and charitable contributions–could provide the $1 billion seen as a floor for additional spending on transportation. Yet, it’s unlikely politicians will modify the exclusions and deductions the federal government sees fit to impose. The same thing is true for similar exclusions and deductions from the federal corporate income tax.
Let’s look at some state level credits and exemptions from income taxes. I was able to identify $318 million in income tax credits related to job creation. Each one has an individual and a corporate component. The largest is the film tax credit, at $163 million. The employer’s job tax credit is $74 million, the manufacturer’s investment tax credit is $65 million, the quality jobs tax credit is $9 million, and the research tax credit is $7 million. Altogether, they add up to $318 million, yet the economic effects of just the film industry is over $5.1 billion. Many would say that’s a pretty good return on investment.
The final major area where the state gives up revenue in tax expenditures is exempting certain items from sales tax. Many of these exemptions are very narrowly targeted, and as a result have less than a million dollar effect, such as “sales to Georgia Society of the Daughters of the American Revolution” (who knew?) or “sales of pipe organs or steeple bells to any church qualifying as a nonprofit.” Some, like the $22 million for “partial sales tax exemption for jet fuel sold to or used by a qualifying airline at a qualifying airport” have drawn the attention of activists and some lawmakers, while the larger $30 million exemption for “Sales of fuel or consumable supplies used by ships engaged in inter-coastal or foreign commerce” flies under the radar. There are big items, like the exemption for food and drugs, totaling $900 million. And Governor Deal has regularly touted removing the sales tax on energy as a way of attracting manufacturing jobs to the Peach State. That combined with no sales tax on manufacturing equipment, materials, and supplies is worth $3.09 billion.
Finally, there is the $4.798 billion in tax revenue forgiven because the state does not tax services. That’s something FairTax proponents might want to keep in mind.
There is a lot of tax policy to consider when looking at the report, and each person will have his or her own opinion of what constitutes a needed tax expenditure. But, for those who think changes should be made, Grover Norquist, the guy who opposes HB 170 as a tax increase would also say that removing any of these tax expenditures is a tax increase, and would require a reduction in taxes elsewhere.