By Kelly McCutchen
It’s a pleasant surprise to see the Georgia Budget and Policy Institute oppose a tax increase, but entirely understandable that the organization would oppose as bad policy any tax plan that raises taxes on 80 percent of Georgians. It is disappointing, however, to see the institute latch onto implausible scenarios and let go of an opportunity to discuss realistic tax reform plans.
Georgia is a fiscally conservative state. Anyone who suggests that elected officials would even consider a plan to raise taxes on most Georgia families or to run multi-billion dollar deficits has to be politically naïve – or academically disingenuous.
A recent report by the organization does just that: It uses unrealistic, extreme assumptions for dramatic effect. One example: examining the impact of cutting up to $4.8 billion from the state budget. How absurd is that? Not only does that amount to almost one-third of total state tax revenue but during the last major tax reform negotiations, a proposed $300 million tax reduction was rejected as too much.
The report, which reveals little about its data or assumptions, assumes a tax increase on 80 percent of Georgia families. The calculations include tax increases but do not appear to factor in enhanced exemptions and deductions like those found in the final tax reform proposal of 2010 or the large “prebate” in the state versions of the FairTax.
The report warns of rising local property taxes, yet appears to ignore the revenue windfall to local governments from a broadened sales tax base. Expanding the sales tax base beyond groceries – which many people are unaware already are taxed at the local level – would improve the local sales tax base, too. This would allow property taxes to be lowered, not raised.
The report also warns of sales tax rates as high as 14.5 percent. Despite the fact this is yet another outlandish assumption, replacing the income tax with the FairTax could double the sales tax base, meaning sales tax rates could be cut in half and still raise the same amount of revenue.
The organization notes the higher taxes paid by the poor as a share of income. This is, of course, true in almost all states. One factor is that poor households spend more money than they report in income. U.S. Census data show, for example, a family with income of $8,191 actually spends an average of $19,413. In addition, the report fails to mention the highly progressive federal income tax (the most progressive in the developed world) or the benefits from welfare programs available to low-income families. (See the nearby chart from Eugene Steuerle, an Institute Fellow at the Urban Institute.)
Interestingly, the report fails to refute the fact that states with low income taxes have greater economic growth than other states – or that overall tax revenues also grow faster in low income tax states. The real-world numbers support economic theory; the Special Council on Tax Reform and Fairness for Georgians stated in its final report that economists generally agree that economic growth is created by a tax system that “taxes consumption rather than income in order to encourage saving and investment.”
There are recent bipartisan examples of economic growth after pro-growth tax changes. Under a Republican governor, Oklahoma reduced its income tax rate from 7 percent to 5.5 percent and under a Democratic governor, New Mexico reduced its income tax rates from 8.2 percent to 4.9 percent. Gross state product over the last decade grew by 37 percent in Georgia, 52 percent in Oklahoma and 60 percent in New Mexico.
The institute deserves credit for recognizing that citizens make decisions based on tax rates at the state level, often crossing state lines to reduce their taxes. Georgia’s sales tax rates are below our neighbors, but with recent tax reforms in North Carolina and Kansas, 28 states will have lower personal income tax rate than Georgia.
Undoubtedly, Georgia could use a boost to its economy. As measured by gross state product, the state’s economy has grown more slowly over the last decade than all but six states. Georgia’s per capita personal income has fallen to 40th in the nation. Tax reform is not the threat to Georgia’s future. Maintaining the status quo is.
Tax Policy and Growth (2001-2011)
Income Tax States
Income Tax States
|Nonfarm Payroll Employment Growth||12.7%||7.6%||4.9%|
|State and Local Tax Revenue Growth*||76.3%||49.8%||47.9%|
|Gross State Product Growth||63.5%||51.4%||45.2%|
|* Tax Growth only through 2010.
Nine lowest income tax states: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas,
Washington, and Wyoming. Nine highest income tax states: Oregon, Hawaii, New Jersey, California, New York,
Vermont, Maryland, Maine and Ohio.
Source: U.S. Census Bureau, Bureau of Economic Analysis, Bureau of Labor Statistics, Laffer Associates
Personal Income Tax Rates
Lower Than Georgia
Alaska – 0%
* NH and TN tax interest and dividends only