As the 2022 legislative session nears the finish line, one of the biggest unresolved issues is tax reform.
The state House passed a bill that would replace Georgia’s six tax brackets with a single rate of 5.25%, down from the current top rate of 5.75%, while increasing the amount of tax-exempt income to $12,000 for individuals and $24,000 for married couples filing jointly. Most itemized deductions would be eliminated, although a few – including the one for charitable gifts – would remain. Including exemptions for dependents, a family of four would no longer pay state income tax on its first $30,000 of income.
It’s a solid, pro-growth reform that within five years would spur the creation of more than 20,000 private-sector jobs, attract half a billion dollars in new investment, and put $2.3 billion of disposable income in Georgians’ pockets, per an analysis commissioned by the Georgia Public Policy Foundation.
The similarly nonpartisan Tax Foundation reported the reform would give Georgia a significant bump in its annual State Business Tax Climate Index, from 32nd today to 16th. But other states are also busy improving their own tax codes. Their willingness to make themselves more competitive is itself a good argument for Georgia to take action.
The state Senate is still considering the House bill and seems likely to want some changes. As the senators mull over the details, it’s worth reviewing why and how we should be thinking about tax reform. .
First and foremost, it’s important to know what the goal is. Some people say they want “tax reform” when they really mean “raise taxes.” Not surprisingly, their proposals will be at odds with those of us who aren’t interested in giving the government more money to spend. (The House bill is projected to cut state revenues by about $1 billion per year.)
It’s also important to be clear on who is paying what today. For example, state data for 2021 show that the 14% of tax filers with adjusted gross income (AGI) of at least $100,000 owed 63% of the income tax. It makes sense, then, that this relatively small group of people would receive the lion’s share of the benefits from a broad-based tax cut.
Similarly, state data show that the 26% of tax filers with AGI of less than $15,000 owed just 0.22% of the income tax. It makes sense, then, that even this relatively larger group of people would receive a smaller benefit from a broad-based tax cut.
These facts imply a certain progressivity to Georgia’s tax code. But in another important sense, the state tax is already rather flat.
The federal tax code is sharply progressive. The top 1% of earners have about 20% of the income but pay about 39% of federal income taxes. That means their share of the tax paid is almost double their share of the income. The top 5% pay about two-thirds more; the top 10% about one-half more; the top 25% about one-quarter more; and the top 50% about 10% more.
However, the state tax code lacks such progressivity because its tax brackets are so narrow: The highest of the six brackets starts at just $7,000 of taxable income for a single filer and $10,000 for a married couple filing jointly. Therefore, each income group already pays a share of the tax bill that is almost the same as its share of income.
In effect, we already have a flat tax; we just also have the unfortunate complexity of a progressive tax code with multiple brackets. Let’s make it official, flatten the code to a single rate, and simplify the process for taxpayers.
This is a key moment for Georgia. Some states we compete with, namely North Carolina, have been trimming their tax rates for years. Others, such as Iowa, are poised to take advantage of today’s favorable conditions to make their tax codes more competitive.
If Georgia doesn’t take the initiative, we risk being passed by.
