Georgia Needs a Personal Income Tax Rate Cut

By Kelly McCutchen

Georgia is 48th in the nation when it comes to growth in personal income per capita over the past decade. Over the past year, job creation was the lowest in the nation and unemployment remains stubbornly high. This state’s economy clearly needs a jolt.

Kelly McCutchen, Public Policy Foundation President

Improving education, workforce training and transportation are critically important to economic growth, but they are long-term issues requiring significant lead time. On the bright side, tax policy can be enacted immediately, and a significant reduction in the personal income tax is just the jolt Georgia’s economy needs.

Tax reform is no silver bullet, but economic experts concur that lowering tax rates spurs economic growth. The Legislature created its own expert tax-reform council two years ago. After a year of study and statewide hearings, the centerpiece of the blue-ribbon tax-reform council’s recommendations last year was a 33 percent reduction in Georgia’s top personal income tax rate.

Cutting the personal income tax rate is not just a tax cut for families, but also a tax cut for entrepreneurs and the majority of small businesses. How important is this? Ninety-three percent of small businesses are organized as “pass- through” entities whose owners pay personal income tax on business earnings — not corporate income tax. These small businesses produce more than half of the business net income in the nation.

Many of those so-called rich taxpayers are, in fact, small-business owners recognizing a one-time windfall of revenue from selling their business. It’s often the nest egg to provide for their retirement earned by years of hard work.

A personal income tax cut will make it easier for Georgia to attract and retain innovative startup companies and highly skilled, creative talent. Georgia has an opportunity to capitalize on the state’s national leadership in areas such as logistics, financial technology, health information technology, bioscience and other high-tech fields. These businesses and their employees can locate anywhere. A lower income tax would certainly make it easier to compete with states like Texas, Tennessee and Florida with no tax on wages.

Studies show state tax revenues actually grow much faster in states with the lowest income taxes. It makes economic and fiscal sense, but is it fair?

A reduction in Georgia’s income tax would require a greater reliance on sales taxes, which have a greater impact on the poor. But as the tax reform council recommended, targeted tax credits can be designed to offset negative impacts on low-income families.

It’s important to evaluate short-term and long-term impacts of major policy changes. Studies show that most families don’t stay poor for long periods of time. A study by the Dallas Federal Reserve Board found that 95 percent of the families in the lowest- income quintile in 1975 were no longer there in 1991. Even poor families will benefit from lower income tax rates as they move up the economic ladder.

The income tax is a tax on upward mobility. The wealthy can hide their income or move to a state without an income tax; poor and middle-class families typically don’t have that luxury. A lower income-tax rate means less tax on a second income, overtime pay or a raise. It also means lower taxes on savings for the future.

Georgia could significantly cut personal income tax rates without reducing state revenues and without harming low-income families. This would enhance economic competitiveness and create a better environment for job creation and innovation. Opportunities for these bold actions don’t occur often. We must seize the day.

(This commentary was published February 22 in the Atlanta Journal-Constitution.)

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