Georgia Public Policy Foundation: Window of Opportunity for Tax Reform in Georgia

Chris Denson

Monday, November 15th, 2021

Lowering and flattening Georgia’s personal income tax rate could create tens of thousands of jobs within five years, according to a new analysis conducted for the Georgia Public Policy Foundation.

Georgia policymakers are often questioned about the lack of a state income tax in Tennessee and Florida, while Alabama and North Carolina both have lower top rates. While the new analysis does not include a model for eliminating Georgia’s personal income tax, it does indicate strong benefits of lowering the rate even as the tax base is broadened to offset revenue losses.

The study by the Beacon Hill Institute (BHI) debuted as the Georgia Public Policy Foundation kicked off its 2021 Georgia Legislative Policy Forum with an online session on state taxes, primarily focused on potential reforms that would allow Georgia to remain economically competitive with our neighboring states.

Buoyed by a state record $3.2 billion surplus, lawmakers will return to the Gold Dome in January with financial flexibility few would have predicted when COVID-19 forced legislators to suspend the session in March 2020.

The panel featured Rep. Shaw Blackmon, Chairman of the House Ways and Means Committee, and Sen. Chuck Hufstetler, Chairman of the Senate Finance Committee. Their perspective is vital: Any legislation that alters the state tax code must pass through their committees.

Providing national expertise on Georgia’s present and future economic competitiveness were Katherine Loughead, Senior Policy Analyst with the Center for State Tax Policy at the Tax Foundation, and William Burke, Director of Research for BHI and co-author of the new report, “Moving Toward a Georgia Flat Tax.”

Notably, the study provides a menu of options for reducing Georgia’s top income tax rate and implementing a flat tax rate across all income groups. It also examines possible revenue offsets in each scenario as the income tax is lowered. Among those considered are broadening the sales tax base, increasing the sales tax rate, and reducing or eliminating certain state tax credits.

The BHI report features four distinct models consisting of a series of rate reductions. The complete study can be found here.  And the job creation possibilities it offers are encouraging.

Model One demonstrates the impact of reducing the top income tax bracket in Georgia to 5% immediately and eliminating all tax brackets. To offset the revenue losses from this reduction, the sales tax is broadened to include construction services, which are currently exempt. The authors project the result would be 21,134 jobs created in 2023 and 22,931 by 2027.

Model Two demonstrates the impact of reducing the top income tax bracket in Georgia to 4% immediately and eliminating all tax brackets. To offset the revenue losses from this reduction, the sales tax is broadened to include those construction services currently exempt as well as professional, scientific and technical services.

The authors project the result would be 32,527 jobs created in 2023 and 35,280 by 2027.

Model Three demonstrates the impact of reducing the top income tax bracket in Georgia to 3% immediately and eliminating all tax brackets. Multiple services currently exempt from sales tax are included to offset this revenue loss, including: construction; motor vehicle and parts dealers; investment and financial advisers; real estate services; professional, scientific and technical services; administrative and support services; waste management and remediation services; promoters of events; agents and managers; repair and maintenance; and personal and laundry services.

The authors project the result would be 43,693 jobs created in 2023 and 46,867 by 2027.

Model Four is unique in that it demonstrates the fiscal and economic impact of a gradual rate reduction over the next five years: 5% in 2023, 4.75% in 2024, 4.5% in 2025, 4.25% in 2026, and 4% in 2027. This model, which does not include any revenue offsets, produces a net loss in revenues compared to the other three.

The authors projected this approach would create 34,166 jobs by 2027.

To present lawmakers with a plethora of options, the authors conducted additional modeling on potential revenue offsets by taxing grocery sales, capping or reducing the film tax credit, and increasing the sales tax rate to 5%.

Addressing opposition to this approach towards a flat rate head on, the authors assert that “concerns about the regressivity of the income tax can be diminished by either increasing the standard deduction and personal exemption or the creation of an income tax credit.” They conclude: “An income tax credit could be designed to better target lower-income groups who would be subject to a higher tax rate because of eliminating marginal income tax brackets.”

As lawmakers prepare for the 2022 legislative session with a record state surplus but inflationary indicators on the rise, the tools are clearly in the toolbox to enable Georgians to keep more of their hard-earned money.