Sales Tax Base: Historically, sales taxes are applied to goods unless exempted while services are exempted unless specifically included by the tax code. Economists agree that there is no economic reason to treat goods and services differently. In fact, all products are a combination of a good and a service. Government purchases should also not be exempt because government often competes with private companies that must collect sales tax.
The accompanying chart shows the steady decline of the Georgia sales tax base over time as a percentage of personal income. Taxing most goods and services at the retail level would more than double Georgia’s sales tax base.
Personal Income Tax Base: Exemptions include the standard deduction, itemized deductions, personal exemptions and retirement income of up to $130,000 per couple. Eliminating these exemptions would increase taxable income by approximately 40 percent.
More than half of all business income nationally is taxed through the individual income tax, not the corporate income tax. That’s because more than nine out of 10 businesses are organized as “pass-throughs” – Partnerships, Sole Proprietorships or S Corporations. That amounts to more than 800,000 small businesses in Georgia.
The nearby table, based on a study by Georgia State University, demonstrates how broadening the sales tax base to include groceries and services enhances growth and reduces volatility.
An almost universally held principle of good tax reform is the goal of broadening the tax base and lowering tax rates. Economists also generally agree that taxing consumption is preferable to taxing income.
|Broadening Sales Tax Base Enhances Growth and Lowers Volatility|
|No Groceries or Services||4.13||23.12|
Small businesses, and start-up companies in particular, are critical to job growth. Without startups, there would be no net job growth in the U.S. economy, according to a study by the Kauffman Foundation. “From 1977 to 2005, existing companies were net job destroyers, losing 1 million net jobs per year. In contrast, new businesses in their first year added an average of 3 million jobs annually.”
Just as important are the entrepreneurs behind those start-up companies. Gallup CEO Jim Clifton has noted that the technology build-out that led to the $10 trillion of unplanned revenue growth over the last 25 years in the United States can be traced to about 1,000 innovators and entrepreneurs.
Georgia has made strides in developing its start-up ecosystem over the last five years, but still loses too many young startups due to a lack of capital. How do you fix that? As former Citicorp CEO famously noted, “Capital goes where it’s welcome and stays where it’s well treated.”
28 States with Personal Income Tax Rates Lower Than Georgia
|Alaska – 0%
Florida – 0%
Nevada – 0%
New Hampshire – 0%*
South Dakota – 0%
Tennessee – 0%*
Texas – 0%
Washington – 0%
Wyoming – 0%
Pennsylvania – 3.07%
North Dakota – 3.22%
Indiana – 3.3%
Illinois – 3.75%
Michigan – 4.25%
Arizona – 4.54%
Kansas – 4.6%
Colorado – 4.63%
New Mexico – 4.9%
Alabama – 5%
Mississippi – 5%
Utah – 5%
Massachusetts – 5.15%
Oklahoma – 5.25%
Ohio – 5.33%
North Carolina – 5.499%**
Maryland – 5.75%
Virginia – 5.75
Rhode Island – 5.99%
Georgia – 6%
Kentucky – 6%
Louisiana – 6%
Missouri – 6%
|* NH and TN currently tax interest and dividends only (not wages). TN passed legislation in 2016 to completely phase out the personal income tax.
** NC rate effective 2017
When entrepreneurs choose to move to Florida, for example, to escape Georgia’s 6 percent income tax, Georgia doesn’t just lose the tax revenue on the sale of the entrepreneur’s business and the tax on his or her earnings. Also lost is their community leadership, their philanthropic giving and the mentoring and investment in the next generation of entrepreneurs.
For business owners, states like Florida and Texas (no tax) are just an airport away. Tennessee (6 percent on dividends and interest income) and North Carolina (5.75 percent income tax and dropping) are a short drive away. It’s easy for the wealthy and retirees to relocate their homes and wealth beyond Georgia’s tax reach. Further, Georgia’s rate reduces its regional competitiveness, leading the state to offer more tax incentives to lure new business.
Second, taxing individuals’ income stifles job creation, because the majority of business income is taxed through the individual income tax.
More important, taxing what individuals earn is a huge disincentive to productivity, business expansion and job creation. Taxing individuals’ income unfairly penalizes people who save more, work more and earn more.
In reality, the income tax is not a tax on the wealthy; it’s a tax on becoming wealthy. The wealthy can hire professional advisors to help them find loopholes and tax shelters. They can purchase non-taxable investments, time their income streams or just spend six months of the year in Florida. It’s the working class that gets stuck paying the bulk of income taxes, which limits their ability to accumulate wealth.
Georgia could use a boost to its economy. According to a study by the Federal Reserve Bank of Atlanta, “If long-term growth rates seem too low relative to other states, lowering aggregate state and local marginal tax rates is likely to have a positive effect on long-term growth rates.” This is exactly the problem facing Georgia.
As measured by gross state product, the state’s economy has grown more slowly from 2002 to 2012 than all but eight states. Tax reform is not the threat to Georgia’s future. Maintaining the status quo is.
Recommendation: Broaden the base of the income and sales tax and reduce tax rates
The method of accomplishing this goal is more of a political decision than a policy issue.
Several options have been studied.
The Special Council on Tax Reform and Fairness for Georgians recommended eliminating most of the current exemptions in the individual income tax code. Another proposal would limit itemized deductions to charitable contributions and up to $20,000 of mortgage interest. This would allow the top personal income tax rate to be reduced to 5.25 percent.
On the sales tax side, the Council recommended expanding the sales tax base to groceries and services that are already taxed in a large number of states. (Gov. Zell Miller phased out the state sales tax on groceries in the 1990s, but local sales taxes were not removed.)
The FairTax is a retail sales tax applied to nearly all goods and services. In studies prepared for the Georgia Senate Fair Tax Study Committee, the Fiscal Research Center at Georgia State University estimated that eliminating the personal and corporate income tax and incorporating a state FairTax with a rate of 6.42 percent would result in no loss of income to the state and would lower the tax burden for most low-income families. A more recent study by the Beacon Hill Institute found a FairTax rate of 5.4 percent would be sufficient. Georgia’s current sales tax rate is 4 percent and local sales taxes add an additional 2-4 percent. With the additional local revenue from a FairTax, local sales tax rates and/or property taxes could be reduced.
 Fiscal Research Center, Georgia State University, reports prepared for the Georgia Senate Fair Tax Study Committee, September – November 2013, “Analysis of Alternative Consumption Tax Structures for Georgia,” September 2013, http://cslf.gsu.edu/files/2014/06/analysis_of_alternative_consumption_tax_structures_for_georgia.pdf
 Georgia Tax Expenditure Report, 2014, http://www.open.georgia.gov/rsa/taxrpt/viewMain.aud
 “Georgia’s Tax Portfolio: Present and Future,” Ray D. Nelson, Georgia State University Fiscal Research Center, September 2012, http://frc.gsu.edu/sites/default/files/documents/Rpt%20247FIN%281%29.pdf
 “Global Migration Patterns and Job Creation,” Jim Clifton, Chairman and CEO of Gallup, 2007, http://bit.ly/1NzTmab
 Policy Memorandum, Fiscal Research Center, Georgia State University, November 2013, page 5, http://bit.ly/1qXh4IM
 The Beacon Hill Institute for Public Policy Research. “A State FairTax for Georgia,” August 2015, https://www.gafairtax.org/wp-content/uploads/2015/04/Beacon-Hill-Rate-Study-2015-08.pdf