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Tax Bill: A Big Step Forward

The General Assembly spent the final hours of its 2022 session passing the usual blitz of bills. One in particular may help spur Georgia’s next decade of prosperity.

The Tax Reduction and Reform Act arrived amid two rising trends: a surplus of tax revenue entering state coffers, and a series of tax reforms by neighboring states. As a response to these trends, it suits the moment nicely.

There were few notable reforms to Georgia’s personal income tax in the decades after its inception in 1929. Unless one qualified for a growing number of deductions and credits, the basic structure of income levels and corresponding tax rates had long remained stagnant. This outdated structure created a certain, obvious ridiculousness: A single taxpayer, for example, hit the highest of six tax brackets at just $7,000 of taxable income.

So the time was ripe for reform, even after a successful 2018 bill that shielded more income from taxation for most Georgians, and lowered the top rate by a quarter-percentage point for all.

The House made the opening bid, passing a bill that the Senate then altered substantially. There were moments in the session’s waning days when it seemed the two chambers’ approaches were too dissimilar to be reconciled.

But the old Gold Dome mantra that the process would “perfect the legislation” may have turned out to be true in this case. Each side contributed essential elements to the bill.

From the House came the original boldness of condensing all six brackets into a single flat rate, along with a generous increase in personal exemptions to ensure lower-income Georgians were better off once the lower brackets were eliminated.

The Senate, on the other hand, maintained the larger income exclusion for those Georgians who itemize deductions on their federal returns. That chamber also took aim at a lower, final flat rate of 4.99%, but also stretched out the process over a period of years and protected against sudden plunges in revenue by instating the kind of “triggers” that have been successful in North Carolina, among other states.

The final product built upon those respective best attributes, speeding up the schedule of tax-rate decreases so that the lowest rate applies sooner to more people.

The final analysis of this multifaceted reform indicates no taxpayer should wind up paying higher taxes, even in the interim. In time, the amount of total savings for taxpayers should be even larger – although the bill adds more stability to state finances by phasing in that larger cut, and requiring certain benchmarks to be met before it is fully implemented.

Did lawmakers truly produce a “perfect” bill? It certainly is improved, although perfection is perhaps always unattainable. Should changes be needed in the future, they probably will be one or both of these:

First, the “trigger” benchmarks may be unrealistic. Not only are there three triggers, any one of which can delay the implementation of further rate cuts, but they may be a bit too cautious. For instance, I’ve not been able to find another state that required annual revenue increases as large as 3% before a rate can be cut. Historically, it appears all three triggers might be met only about half the time – meaning it could take 10 years to whittle the rate from 5.49% to 4.99%, not the five envisioned in the bill. That would be slow-going.

Second, keeping all itemized deductions in place may avoid small tax increases for a relative handful of payers, but it also prevents the broadening of the tax base needed to drive rates down further, faster. The good news? Every time tax rates fall, the value of a deduction decreases. So as the reforms near full implementation, it may become easier to phase out deductions for a few and cut rates even further for all.

But these are relatively small nitpicks. It’s far better to face the problem of accelerating planned tax cuts than of approving a plan in the first place.