The Georgia Senate voted Wednesday to approve a pro-growth tax reform that would reduce Georgia’s marginal personal income tax rate, the first change since the rate was implemented in 1937. Final passage depends on the House agreeing to the Senate’s changes to the bill and the Governor’s signature. The arguments from opponents of a tax cut range from weak to unfounded; the Georgia Public Policy Foundation rebuts them below.
Claim: Tax Reform Needs More Comprehensive Study
Tax reform has been studied comprehensively and debated extensively for at least six years. Large corporations have benefited from some reforms but families and small businesses have seen little change.
Just in the past 24 months, the legislature has held at least six hearings on tax reform and the Fiscal Research Center at Georgia State University published three studies and a fiscal note.
- A study and testimony on February 10, 2014, estimated “the effect of limiting itemized deductions to only charitable contributions and mortgage interest, with the latter capped at $20,000 per year.” This eventually was introduced as HB 435.
- A presentation was given to the Senate Finance Subcommittee on Tax Reform on December 11, 2015.
- A presentation was given to the Senate Finance Committee on February 24, 2016.
- The official Fiscal Note was published on January 28, 2016.
In addition, the Georgia Public Policy Foundation provided testimony on November 9, 2015, before the Senate Finance Subcommittee on Tax Reform and published an analysis comparing the proposal to the recommendations of the 2010 Special Council on Tax Reform and Fairness for Georgians and the recent tax reforms in North Carolina.
Reality: There has been plenty of study. It’s time for action on tax reform, even if it’s not as significant as many of us would have hoped after six years.
Claim: Tax Reform Threatens Georgia’s AAA Bond Rating
The legislation is based on solid economic principles. Most economists would agree it is “pro-growth.” The Tax Foundation analyzed the proposal and predicts it would significantly improve Georgia’s ranking to 18th overall on the State Business Tax Climate Index, up from the current ranking of 39th.
Increasing economic growth would most certainly be viewed positively by the ratings agencies. The tax reforms enacted by North Carolina in 2013 and 2015 were far more bold than this proposal, reducing both their corporate and personal income tax rates dramatically at a projected loss of revenue of $500 million. Despite this, North Carolina has retained its AAA bond rating. Finally, bond rating agencies prefer states to have the flexibility to raise taxes if necessary. Due to a constitutional amendment passed in 2014, Georgia’s personal income tax rate is capped at 6 percent. Therefore, reducing the income tax rate below 6 percent would return that flexibility.
A February 2016 Forbes article on North Carolina’s AAA rating highlights the positive effect of the tax cuts:
Bond-rating giant Moody’s credits North Carolina’s AAA rating to “the state’s long history of conservative fiscal practices, an economy that continues to recover and expand, and declining debt levels.” In a similarly glowing statement, Standard & Poor’s writes that North Carolina’s “favorable” economic climate has “helped spur strong domestic in-migration, which has been good for population and economic growth.” … Understanding that when we place a high price on work, we get less of it, [Governor] McCrory in 2013 took decisive action toward the North Carolina state income tax. … In the coming years, we should expect to see North Carolina emerge victorious when it competes for business and residents with higher-income-tax states.
In the Southeast, only South Carolina’s top rate of 7 percent is higher than Georgia. Nationally, 28 states have lower marginal rates.
Reality: All indications are this proposal will not harm the state’s AAA Bond Rating.
Claim: “Slashing” Income Taxes Threatens State Revenues
Evidence in North Carolina shows that its pro-growth reforms cost much less than projected, but even so, the initial income tax revenue loss to Georgia represents less than 1 percent of state general fund revenues. If this were a legitimate concern, liberal legislators would have (and should have) offered amendments to the proposal during the committee process. A simple change in the tax rate from 5.4 percent to 5.5 percent would result in zero reduction in revenue, according to Georgia State University’s analysis. Instead, the bill won unanimous approval by Democrats and Republicans in committee.
Reality: The projected revenue loss from the income tax changes is less than projected in North Carolina, less than 1 percent of Georgia’s state general fund revenues and less than the annual cost of Georgia’s film tax credits.
Claim: Tax reform only benefits the rich, to the detriment of the poor and middle class
Liberal groups in Georgia claim tax cuts only benefit “the top 1 percent” and repeat charges that North Carolina’s tax reforms “raised taxes on an estimated 80 percent of North Carolina families.” This accusation has been proven false. The Washington Post gave a similar claim “Three Pinocchios,” noting:
On its face, it is pretty absurd to think that a tax reform bill that cut rates and eliminated tax loopholes ended up raising taxes on 80 percent of the people in the state. Broadly speaking, the wealthy do appear to gain more from the 2013 tax overhaul, but they also pay the lion’s share of income taxes. And 35 percent of the people appear to face a tax increase, including some of the wealthiest people in the state – not 80 percent, all at the bottom.
Under this proposal, an average Georgia family of four that itemizes would pay no tax on the first $34,000 of income. Georgia State University’s analysis broke out taxpayers into 20 different income groups and found this proposal either lowered or had no change on the median and average taxpayer in EVERY income group.
In North Carolina, median household income since the year before tax reform was enacted (2012) to 2014 has grown by $5,231, or more than $2,500 more than the national average. As middle-class incomes have stagnated over the last decade, this would be a welcome change for Georgians.
Finally, critics conveniently overlook the fact that more than half of all business income is taxed through the individual income tax, not the corporate income tax. This is because most businesses (94 percent in 2011) are organized as “pass-throughs” – either Partnerships, Sole Proprietorships or S Corporations. Reducing the personal income tax impacts more than 800,000 small businesses in Georgia. Much of this revenue is likely to be reinvested in the businesses to create jobs and employee raises.
Reality: Just as North Carolina’s tax cuts benefited most residents, this proposal would benefit most Georgians.
The Georgia Senate voted Wednesday to approve a pro-growth tax reform that would reduce Georgia’s marginal personal income tax rate, the first change since the rate was implemented in 1937. Final passage depends on the House agreeing to the Senate’s changes to the bill and the Governor’s signature. The arguments from opponents of a tax cut range from weak to unfounded; the Georgia Public Policy Foundation rebuts them below.
Claim: Tax Reform Needs More Comprehensive Study
Tax reform has been studied comprehensively and debated extensively for at least six years. Large corporations have benefited from some reforms but families and small businesses have seen little change.
Just in the past 24 months, the legislature has held at least six hearings on tax reform and the Fiscal Research Center at Georgia State University published three studies and a fiscal note.
- A study and testimony on February 10, 2014, estimated “the effect of limiting itemized deductions to only charitable contributions and mortgage interest, with the latter capped at $20,000 per year.” This eventually was introduced as HB 435.
- A presentation was given to the Senate Finance Subcommittee on Tax Reform on December 11, 2015.
- A presentation was given to the Senate Finance Committee on February 24, 2016.
- The official Fiscal Note was published on January 28, 2016.
In addition, the Georgia Public Policy Foundation provided testimony on November 9, 2015, before the Senate Finance Subcommittee on Tax Reform and published an analysis comparing the proposal to the recommendations of the 2010 Special Council on Tax Reform and Fairness for Georgians and the recent tax reforms in North Carolina.
Reality: There has been plenty of study. It’s time for action on tax reform, even if it’s not as significant as many of us would have hoped after six years.
Claim: Tax Reform Threatens Georgia’s AAA Bond Rating
The legislation is based on solid economic principles. Most economists would agree it is “pro-growth.” The Tax Foundation analyzed the proposal and predicts it would significantly improve Georgia’s ranking to 18th overall on the State Business Tax Climate Index, up from the current ranking of 39th.
Increasing economic growth would most certainly be viewed positively by the ratings agencies. The tax reforms enacted by North Carolina in 2013 and 2015 were far more bold than this proposal, reducing both their corporate and personal income tax rates dramatically at a projected loss of revenue of $500 million. Despite this, North Carolina has retained its AAA bond rating. Finally, bond rating agencies prefer states to have the flexibility to raise taxes if necessary. Due to a constitutional amendment passed in 2014, Georgia’s personal income tax rate is capped at 6 percent. Therefore, reducing the income tax rate below 6 percent would return that flexibility.
A February 2016 Forbes article on North Carolina’s AAA rating highlights the positive effect of the tax cuts:
Bond-rating giant Moody’s credits North Carolina’s AAA rating to “the state’s long history of conservative fiscal practices, an economy that continues to recover and expand, and declining debt levels.” In a similarly glowing statement, Standard & Poor’s writes that North Carolina’s “favorable” economic climate has “helped spur strong domestic in-migration, which has been good for population and economic growth.” … Understanding that when we place a high price on work, we get less of it, [Governor] McCrory in 2013 took decisive action toward the North Carolina state income tax. … In the coming years, we should expect to see North Carolina emerge victorious when it competes for business and residents with higher-income-tax states.
In the Southeast, only South Carolina’s top rate of 7 percent is higher than Georgia. Nationally, 28 states have lower marginal rates.
Reality: All indications are this proposal will not harm the state’s AAA Bond Rating.
Claim: “Slashing” Income Taxes Threatens State Revenues
Evidence in North Carolina shows that its pro-growth reforms cost much less than projected, but even so, the initial income tax revenue loss to Georgia represents less than 1 percent of state general fund revenues. If this were a legitimate concern, liberal legislators would have (and should have) offered amendments to the proposal during the committee process. A simple change in the tax rate from 5.4 percent to 5.5 percent would result in zero reduction in revenue, according to Georgia State University’s analysis. Instead, the bill won unanimous approval by Democrats and Republicans in committee.
Reality: The projected revenue loss from the income tax changes is less than projected in North Carolina, less than 1 percent of Georgia’s state general fund revenues and less than the annual cost of Georgia’s film tax credits.
Claim: Tax reform only benefits the rich, to the detriment of the poor and middle class
Liberal groups in Georgia claim tax cuts only benefit “the top 1 percent” and repeat charges that North Carolina’s tax reforms “raised taxes on an estimated 80 percent of North Carolina families.” This accusation has been proven false. The Washington Post gave a similar claim “Three Pinocchios,” noting:
On its face, it is pretty absurd to think that a tax reform bill that cut rates and eliminated tax loopholes ended up raising taxes on 80 percent of the people in the state. Broadly speaking, the wealthy do appear to gain more from the 2013 tax overhaul, but they also pay the lion’s share of income taxes. And 35 percent of the people appear to face a tax increase, including some of the wealthiest people in the state – not 80 percent, all at the bottom.
Under this proposal, an average Georgia family of four that itemizes would pay no tax on the first $34,000 of income. Georgia State University’s analysis broke out taxpayers into 20 different income groups and found this proposal either lowered or had no change on the median and average taxpayer in EVERY income group.
In North Carolina, median household income since the year before tax reform was enacted (2012) to 2014 has grown by $5,231, or more than $2,500 more than the national average. As middle-class incomes have stagnated over the last decade, this would be a welcome change for Georgians.
Finally, critics conveniently overlook the fact that more than half of all business income is taxed through the individual income tax, not the corporate income tax. This is because most businesses (94 percent in 2011) are organized as “pass-throughs” – either Partnerships, Sole Proprietorships or S Corporations. Reducing the personal income tax impacts more than 800,000 small businesses in Georgia. Much of this revenue is likely to be reinvested in the businesses to create jobs and employee raises.
Reality: Just as North Carolina’s tax cuts benefited most residents, this proposal would benefit most Georgians.
