Over the weekend, Walter Jones wrote a long story for Morris News on the potential risks of moving to a sales tax and reducing or phasing out the state’s income tax. The idea has drawn a lot of support here in the state where John Linder and his successor Rob Woodall have sponsored the federal version, H.R. 25, also known as the FairTax. Georgians look to no income tax Florida to our south, and to Tennessee to our north, which only taxes interest and dividend income and wonder why the same thing can’t be done here. They point to Texas, another state without income taxes, but one that has experienced phenomenal business growth.
The pie chart to the right shows the various sources of income going into Georgia’s 2016 budget. This year, 45% of revenue will come from the state’s individual income tax, 4% from corporate income taxes, and 26% from sales taxes. That’s three quarters of state revenue, with no other source making up more than 6% of revenue.
Two bills were introduced during the 2015 session that would move increase sales tax revenue while reducing the top 6% income tax rate. The one receiving the most attention is Rep. John Carson’s More Take Home Pay Act, which would drop the top income tax rate to 4% while raising the state sales tax rate to 5%. The House Ways and Means Committee has begun to hold hearings on Carson’s bill, which has undergone some revisions since it was introduced.
Another bill, introduced by Reps. Brett Harrell and B.J. Pak, is a more moderate measure that would trade the loss of most tax deductions for a three quarter point drop in the income tax rate, to 5.25%. And as part of House Bill 170, which provided additional revenue and funding for transportation, a Special Joint Committee on Revenue Structure will meet this fall to see if it can come up with some sort of proposal that would have the advantage of not being vetted by the normal House and Senate committee process, and would be subject to up and down votes in the House and Senate.
Against all of this comes Governor Nathan Deal, who worries that a significant change in the Peach State’s tax structure could mean a loss of the state’s AAA bond rating, and potentially cripple his efforts to change the way we fund K-12 education. In his story, Jones quotes a number of economists and investors who urge caution when considering changes that could affect the state’s bond ratings, and point to the experience of Kansas, which dropped income tax rates and found itself in an ongoing revenue squeeze.
While economists generally agree that there is a long-term benefit to reducing or eliminating the income tax, in terms of bond ratings, they look at cash flow, something Gov. Deal recognizes.
“We need to ensure that we’re on solid footing in order to sustain the budgets that we have continued to pass and will pass,” [Gov. Deal] said.
A boost in annual education funding by $1 billion over the last two years and rising health care costs are the two biggest expenditures just to maintain current service levels.
“There are areas where we know it’s going to cost us more money to do things,” he said.
But he’s interested in going beyond just maintenance-level government.
“If we envision any major reforms coming out of our education reform commission, there will be, probably, significant dollars associated with those recommendations,” he said. “… I would hate for us to be in a posture where we have to reject those simply because we don’t have a stable revenue stream to be able to support them.”
One way that governments have been able to ensure relatively consistent revenues is to draw from a number of different sources, typically income taxes, sales taxes, and property taxes. In theory a drop in revenue from one source will be mitigated by more stable revenue from the other ones. But, Georgia eliminated state property taxes, leaving that revenue source to counties and cities.
Georgians will have to decide what is more important moving forward: a consumption tax that offers long term growth potential leading to more jobs and an improved economy, or a more balanced approach that provides the stability and incremental growth preferred by the financial sector.