Laying the groundwork for major fiscal reform

By Kelly McCutchen

With more than a half-billion-dollar budget surplus and a booming stock market, Georgia’s economic future looks bright. Of course, things looked bright in the late 1990s, too.

Trying to gauge the economy 12-18 months into the future is difficult, if not impossible, but that is exactly what state legislators are asked to do each year when they pass a budget. Even as this year’s session features debate on grand ideas, legislators’ priority should be to lay the foundation for reforms that will strengthen Georgia’s economy in good times and bad.

At least 10 major tax reform ideas have emerged over the past year. Many of these ideas may appear attractive at first glance, but each should be critically analyzed to avoid hidden flaws – the unintended consequences. Tax reform should focus on more transparency, simplicity, equity and stability. Tax policy should not be targeted at picking winners and losers; instead, policymakers should limit exemptions to encourage a broad tax base and low rates. The tax code should be a method of encouraging economic growth, which leads directly to job creation, opportunity and prosperity for our citizens.

Several tax proposals meet these criteria.

One ailment of Georgia’s tax code relates to health insurance. Employers and the self-employed buy health insurance with pre-tax dollars, but individuals must pay with after-tax dollars. By allowing individuals to deduct the cost of health insurance from their state taxes, and encouraging the federal government to do the same, lawmakers would eliminate this inequity and undoubtedly reduce the number of uninsured Georgians.

A key component of transparency is that taxes should not be hidden in business transactions. Sales taxes should apply to all goods and services at the point of sale to the consumer. Georgia is one of only a handful of states that levy a sales tax on the cost of energy used by manufacturers. Not only does this violate commonsense principles by taxing business transactions, but it also puts Georgia manufacturing jobs at risk.

Finally, Georgia’s long-term goal should be to dramatically reduce or eliminate its state income tax. Of all types of taxes, the income tax is the most harmful to economic growth because it provides a disincentive for productive effort.

Georgia has the 25th-highest tax burden in the country, according to the Tax Foundation. Lowering this state’s tax burden means reducing the growth of government. Transparency is one of the best protections against needless government expansion.

A state and local spending limit would make increased spending very transparent. A spending limit prevents government from growing faster than a predetermined benchmark, unless overruled by a supermajority vote or a referendum. At the state level, the Governor could enforce a spending limit immediately by using his power to set the annual revenue estimate. At the local level, this would spell the end of “stealth” tax increases. All existing arbitrary restrictions on local revenues could be eliminated and local governments would gain the flexibility to design a tax system that best fits their needs.

Georgia should also implement a state version of the recently passed Federal Funding Accountability and Transparency Act introduced by Senators Tom Coburn and Barack Obama.President Bush quipped that this law will allow citizens “to Google their tax dollars.” Georgia could establish a searchable database of all recipients of state funding, providing added transparency to help citizens determine the difference between “pork” and justifiable grants and contracts. This fits perfectly with General Assembly’s recently passed requirement for every public school to publish its budget each year.

Principled tax reform, limited spending and transparency in government are all worthy goals for the upcoming session of the Georgia General Assembly. Republican leaders in Congress lost their majority because they failed to live up to their conservative fiscal principles. Let’s hope Georgia’s elected officials don’t forget theirs.

Kelly McCutchen is executive vice president of the Georgia Public Policy Foundation, 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 (January 5, 2007). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.

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