Two years ago, state governments near and far appeared in danger of fiscal collapse. Instead, their staggering rebound has ushered in a golden era of pro-growth tax reform.
A dozen states cut their income-tax rates last year, and four more implemented previously planned rate cuts. Mississippi’s House of Representatives kicked off 2022 with a bipartisan, 96-12 vote to begin phasing out their state’s income tax altogether.
Many Georgians want to know if we’ll be joining the parade.
That remains to be seen. The biggest tax-reform proposal on the table – so far – is Gov. Brian Kemp’s plan to return $1.6 billion from this year’s surplus to taxpayers, sending $250 to individuals and $500 to married couples. Georgians may appreciate having some cash back in their pockets, but a one-time refund doesn’t improve incentives to work, save and invest, which drive economic growth.
As I’ve explained before, it’s risky to make permanent changes based on apparently temporary revenue spikes. That goes for tax cuts just as much as spending increases. But there are ways to reduce tax rates and spur economic growth without draining the state treasury.
To demonstrate how, the Georgia Public Policy Foundation commissioned a report examining different ways to achieve two main goals: reduce Georgia’s six income-tax brackets to a single, flat rate; and lower that rate from today’s top marginal rate of 5.75%. We asked the firm, the Beacon Hill Institute, to model its changes as close to “revenue neutral” as possible by incorporating offsetting increases to other taxes (primarily by applying the sales tax to services that currently aren’t taxed) and to estimate how much economic and job growth Georgia would enjoy as a result.
Here’s what we found: Even without cutting tax revenues, flattening and lowering Georgia’s income-tax rate would be a big winner in terms of economic growth and job creation.
The report modeled changing Georgia’s individual income tax to a flat rate of either 5%, 4% or 3%. A fourth option was to lower it immediately to a flat 5%, then cut it by a quarter-point per year until reaching 4%.
The benefits of these changes are impressive. By moving to a flat rate of 5%, the state within five years could boost employment by almost 23,000 and aggregate disposable income by more than $2.5 billion, with almost $500 million in new investment.
Even better, moving to a flat rate of 3% would create nearly 47,000 jobs and more than $7.7 billion in disposable income, with more than $750 million in new investment. The benefits of a flat rate of 4% would fall in between those two.
Why not cut the rate all the way to zero? For starters, the only state up until now that ever had a tax on wages and got rid of it is Alaska, which makes up for the difference with oil and gas revenues. That’s not to say it’s impossible – keep an eye on Mississippi – but no other state has managed it yet.
And although our neighbors Florida and Tennessee get a lot of attention for having no income tax, simply getting to 4% from today’s 5.75% would move Georgia well up the rankings. Here’s a list of states with a top rate equal to or below our 5.75%, but greater than 4%: Alabama, Arizona, Colorado, Illinois, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Mississippi, Missouri, North Carolina, Ohio, Oklahoma, Utah and Virginia. That’s one-third of the nation – although North Carolina and Ohio have already acted to get below 4% in the coming years.
The point is, tax competition among the states is fierce. It’s not the only factor when individuals and corporations decide the best place to live or do business, but it does matter. It may be of greater importance to entrepreneurs and small-business owners as they grow their firms, and we need all the homegrown jobs and future large employers we can nurture.
It’s time for Georgia to join the competition.