Give Income Tax Cuts a Chance

March 28th, 2008 by Leave a Comment

By E. Frank Stephenson

Good news for Georgia taxpayers: It is looking increasingly likely that the 2008 General Assembly session will result in a significant tax cut. What remains less certain is which of the competing plans offered will be enacted. 

Governor Sonny Perdue, hoping to fulfill one of his 2006 campaign planks, wants to eliminate taxes on retirement income. Retirement income up to $35,000 is now exempt from Georgia income taxation; this would make retirement income over $35,000 tax-exempt.  

That would offer immediate tax benefits, but to only a small share of Georgians. It would offer little incentive for people to undertake more work, saving or business creation, but it might induce more migrating retirees to choose Georgia over states such as Florida. Whether Georgia – especially the congested metro Atlanta area – has a compelling need to attract more residents is questionable but, by some calculations, such retirees pay $4 in taxes for every $3 of government services that they use. 

House Speaker Glenn Richardson wants to eliminate the state’s 0.25 mill property tax on homes and the “car tax.” The car tax, the personal property tax on autos, is easy to dislike, coming due on one’s birthday, but this annoying provision is a sensible approach to spreading the workload of county tag offices over the course of a year rather than having a single due date. Unfortunately, it is also a form of double taxation: Cars are subject to sales tax at the time of purchase. 

Eliminating the car tax would be a larger and more broad-based tax cut than Gov. Perdue’s proposal but it, too, does little to increase economic incentives to work, save or invest. It does reduce the disincentive for buying a new or more expensive vehicle, but it is not obvious that reducing such disincentives should be the highest priority of tax policy. And local governments are rightfully skeptical about how long the state would honor its promise to compensate them for the lost revenue. 

Lieutenant Governor Casey Cagle proposes to cut Georgia’s income tax rates by 10 percent over five years. Georgia’s top marginal tax rate – the rate affecting most Georgians because it kicks in at only $10,000 of taxable income for married taxpayers and $7,000 for single taxpayers – would fall from 6 percent to 5.4 percent. Other marginal tax rates would be similarly reduced. This is a sensible, albeit modest, step toward letting people keep more of what they earn. Moreover, reducing marginal tax rates increases people’s incentive to work, save and create new businesses. Because Georgia’s neighbors Tennessee and Florida do not have income taxes, such a move would be particularly useful.  

The economic merit of a broad-based income tax cut is that it creates significant incentives for improved economic prosperity. This especially effective if it comes, as proposed, with government accountability and transparency. The reduced income tax rate would be accompanied by spending restraint to offset reduced tax revenue, capping the rate of growth of government spending at population growth plus the rate of inflation. As the economy grows at a more rapid rate in coming years, spending growth will be restrained as the income tax cut is phased in. Legislators would, of course, have the option of waiving the spending cap in the case of unforeseen contingencies. 

In addition to cutting income or car taxes, both the Senate and House plans would limit property tax assessments to 2 percent for residential property and 3 percent for other property. Caps of this sort are probably unwise. They may not truly restrain property taxes because they do not constrain millage rates. Moreover, caps create lock-in effects and tax inequities. With property values reset to market rates when homes are sold, someone looking to sell an existing home loses the incentive to sell. Perversely, a senior looking to downsize from a home once needed for growing children might face higher property taxes in a smaller, retirement home. Also perversely, two neighbors with identical houses can have different property tax liability solely because one has lived in the home longer, thereby having his or her assessment capped longer than the neighbor.

While Georgia’s taxpayers should welcome tax relief in any form, they should also hope the General Assembly embraces a tax cut that will increase both economic prosperity and government accountability. 

E. Frank Stephenson is associate professor of economics and Chairman of the Department of Economics at Berry College in Mount Berry, Georgia. The Georgia Public Policy Foundation is an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.

© Georgia Public Policy Foundation (March 28, 2008). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.

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