Tricky Tax Competitiveness

Along with the gusher of spending from Washington, D.C., has come a debate about how to pay for it all. State lawmakers should listen carefully and act accordingly.

Some harmful proposals to raise tax rates could be implemented, depending on how willing Senate Democrats are to pass bills via the “reconciliation” process and a tie-breaking vote from Vice President Kamala Harris. As federal taxes rise, states will have even more reason to cut their rates to remain competitive – not only with one another, but internationally.

Foreign direct investment is an important part of economic development in a state like Georgia; consider the huge SK Battery factory nearing completion in Commerce, with a second one already planned to bring the total investment to $2.6 billion. If Congress were to raise the corporate income tax rate as proposed by President Joe Biden, to 28% from today’s 21%, future investments by non-U.S. companies would be less attractive, and American companies would be at a disadvantage globally.

It would be left to state governments to compete by reducing their own tax rates, which vary widely. Even under a suggested compromise to raise the corporate rate “only” to 25%, an analysis by the nonpartisan Tax Foundation shows combined federal and state rates would reach as high as 33.6% (in New Jersey). The average across all states would hit 29.53%, up from 25.8% today.

The average rate among the world’s major industrialized nations is 23.51%, so it would make a big difference whether a state is close to that average or as many as 10 percentage points higher.

Where does Georgia rank? The Tax Foundation says our combined rate would be 29.3%, which is 32nd highest and very close to the average. If 32nd highest doesn’t sound too bad, know that our rate would be higher than all of our neighbors except Tennessee, as well as other states we compete against for jobs, such as Texas, Ohio and Colorado.

Now’s a good time to recall there are two ways to think about taxes. The first is to look at how much tax revenue is collected across the board. On that score, Georgia ranks quite well. Only Florida collects less state revenue per person than Georgia does, and only Tennessee is lower when local revenues are added. For state and local revenues as a percentage of income – which measures the affordability of taxes by comparing them to average earnings – Georgia is 10th lowest.

Any way you slice it, the overall tax burden is pretty low here.

But rates matter, too. They matter to investors, to employers, to workers, to consumers. Even though the burden across all types of taxes is low in Georgia, people and companies also care what tax rate they’ll pay on the next dollar earned, the next dollar spent, the next $1,000 of property value, and so on.

That’s why it matters that, even though we bring in less revenue than most of our neighbors, most of them will have lower corporate income-tax rates. That’s why it matters that two of our neighbors (Tennessee and Florida) have no individual income tax, and a third (North Carolina) has moved its rate from higher than ours to lower than ours over the past decade.

The trick is to be competitive both on the overall burden and on the rates of each major type of tax. It’s about what we pay altogether now, as well as what each investor, employer, worker and consumer pays on the next dollar.
Good state policy offers a measure of stability amid the herky-jerky policy landscape nationally. Remember, it was just four years ago that Congress and President Donald Trump lowered the top federal corporate income-tax rate from 35% to 21%. Now we’re talking about going back halfway up, among other tax hikes.

The relative predictability of a state that consistently shows it wants to attract business investment is a good thing for its economy and its people.

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