Next steps in Georgia tax reform

When it comes to state income taxes, Georgia competes in a low-tax region. North Carolina has a flat 4.75% rate, Louisiana’s top tax bracket charges just 4.25%, and Florida and Tennessee levy no personal income tax at all. That is stiff competition. 

With the rapid post-pandemic rise in telework agreements that allow employees to work from home, states now more than ever compete to attract and retain workers—especially high-earners—with tax incentives, improved economic conditions, and a better quality of life. Georgia has been playing some of that game from behind. But it doesn’t have to.

Like other states, Georgia benefitted from federal stimulus during the Covid-19 years and its coffers now enjoy strong surpluses. The state’s Taxpayer Reserve Fund boasts more than $5 billion. And the treasury holds another $10 billion in undesignated reserves. Those excess funds give Georgia options and flexibility to pursue tax reforms that will make the state more economically competitive.   

The significant tax reforms enacted in 2022 were a good start. Those reforms made Georgia a flat-tax state with a 5.49% income tax on all earners now that gradually drops to 4.99% by 2029. They raised the standard tax deductions for single and married filers and eliminated federal tax deductions. Responsible new tax reforms can put Georgia’s surpluses to work and do even better. Here’s how.

Half of the undesignated $10 billion reserve funds should be returned to taxpayers sooner rather than later through lower tax rates for individuals and businesses. The other half should remain in reserve to help during tougher economic times.

Although tax-and-spend policymakers routinely look for new ways to tax businesses, the stubborn fact—supported by reams of academic studies—is that corporate income taxes are the most economically harmful taxes on the planet. They reduce funds available for investment, expansion, hiring, and wage increases by taking dollars from the most productive spenders in the community (businesses) and giving it to the least productive spenders (governments). And the personal income tax is the second worst. Cutting workers’ take-home pay via the income tax limits their ability to save, invest, and spend as they see fit, which reduces the economic incentive to earn and produce. 

Not surprisingly, reducing corporate and personal income taxes have the opposite effects.

The Buckeye Institute’s Economic Research Center recently modeled several tax reform scenarios calibrated to Georgia’s economy. Current state surpluses allow Georgia to gradually reduce its 5.75% corporate income tax by 1.15% each year for the next four years until the tax is eliminated in 2028. A 1.15% cut in 2024 would yield a $1 billion increase in Georgia’s gross domestic product (GDP) and an additional 2,000 jobs. By 2028, Georgia would reap $5.5 billion in GDP growth, 10,000 new jobs, and $4.4 billion more in investment.  

Georgia can also afford to reduce its personal income tax faster, returning more money to taxpayers sooner. Accelerating flat-tax rate reductions by another .2% each year, Georgia could reach a 3.99% flat-tax in 2030. If started last month, that pace would boost economic growth in 2024 by more than $600 million and add 2,000 jobs. And by 2030, Georgia’s economic growth would exceed $5 billion annually and gain 16,000 new jobs. State surpluses, slower public spending rates, and revenue from faster economic growth would offset declines in tax revenue and make Georgia significantly more economically competitive with regional neighbors.

A strong fiscal balance sheet and a healthy rainy-day fund give Georgia policymakers options and an opportunity to further improve the state’s economic prospects. Federal stimulus has run dry, but sustainable tax reforms offer a proactive way to keep state reserve funds flush while returning tax dollars to families and businesses that will put them to good use. Those reforms will make Georgia more attractive to prospective employers and their workers, and the state will be better for it in the long run.

Rea S. Hederman Jr. is executive director of the Economic Research Center and vice president of policy at The Buckeye Institute.

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