Georgia lawmakers brought a tax reform package across the finish line in 2022 that will change the state’s progressive income tax to a flat 5.49 percent tax starting in 2024, with triggers to provide tax reductions. additional fees. This is an important step forward, but if the state really wants to cement its status as a competitor in an increasingly mobile post-pandemic economy, lawmakers should consider strengthening its reforms.
The past two years have been marked by a different focus on state tax reform and competitiveness, with many states cutting their individual and corporate income tax rates. And for good reason: The ongoing shift to remote and flexible working has freed up both businesses and employees to be much more mobile than ever before. The numbers show that, overall, people are moving from high-tax states to low-tax states with strong economies.
Georgia’s revenue trigger mechanism in the 2022 bill is intended to give the state an edge in this competitive landscape by lowering the income tax rate to 4.99 percent over time. This target rate would put the state just below neighboring Alabama (5 percent) and put more distance between it and South Carolina (6.5 percent). North Carolina already has a low individual income tax rate of 4.75 percent, down from 4.99 percent last year, and it will drop further to 3.99 percent by 2027. Also, Tar Heel State is completely eliminating its corporate income tax by 2030. Tennessee and Florida have no income taxes, so Georgia’s income tax rate reductions would help narrow this gap.
However, Georgia’s ability to meet the 4.99 percent target rate is limited by the bill’s tax trigger mechanism. Although well-intentioned, the current design has several problems. Because it is not based on a predetermined baseline and is based on both revenue projections and comparisons to a rolling benchmark of prior years’ revenue, the activation system does not meaningfully connect rate reductions with the ability of the state to pay them. This means that tax cuts could be delayed in years when the state could afford them, but could still be triggered in leaner years when the state would not choose to lower rates.
Maintaining needed revenue during tax cuts is important, and a well-structured trigger design could help the state ensure this. However, putting obstacles in the way of affordable income tax rate reductions could set Georgia back in the rapidly changing fiscal landscape.
For a more effective mechanism, policymakers should consider setting a dollar benchmark (adjusted for inflation) with reductions triggered when revenues exceed that benchmark by a specified percentage. The state may include an annual growth factor above inflation, if desired. This system promotes revenue stability, or leaves room for revenue growth, if policymakers opt for a growth factor above inflation, while avoiding the twin errors of ignoring growth if it is gradual or identifying mistaking a post-recession rebound as real growth.
By moving to a flat income tax, Georgia has already made a significant commitment to tax competitiveness. Although the state’s top rate threshold is already very low, a true flat rate income tax will help protect taxpayers from inflation-related tax increases and provide a hedge against rising tax rates in the future. To combine responsible income tax rate reductions with these benefits, Georgia must create tax triggers that allow the state to keep up with its competition.
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