OPINION: Time for an update to the state tax code

In March, Gov. Brian Kemp signed HB 593 and HB 114 to cut taxes for Georgians and increase incentives for adoption at the Georgia State Capitol in Atlanta. While there have been small changes to income tax rates, Georgia's six tier income tax structure hasn't changed since the 1930s. Income tax as well as sales and use tax form the bulk of state revenues. (Alyssa Pointer / Alyssa.Pointer@ajc.com)
Caption
In March, Gov. Brian Kemp signed HB 593 and HB 114 to cut taxes for Georgians and increase incentives for adoption at the Georgia State Capitol in Atlanta. While there have been small changes to income tax rates, Georgia's six tier income tax structure hasn't changed since the 1930s. Income tax as well as sales and use tax form the bulk of state revenues. (Alyssa Pointer / Alyssa.Pointer@ajc.com)

Credit: Alyssa Pointer / Alyssa.Pointer@ajc.com

When was the last time you paid attention to how state taxes are generated?

Was it when you paid your income tax and wondered why you seemed to qualify for few tax credits?

Maybe you think about it every time you are taxed on goods like frozen or prepared foods but not taxed on services like banking or interior design.

Most likely, you don’t think about state taxes much at all. But here’s a reason why you should: Georgia’s system of taxation hasn’t been updated in decades.

Georgia relies mostly on income tax as well as sales and use taxes for revenue generation. While there have been some rate adjustments, the bracket system used for income taxes has been in place since 1937. Georgia’s sales tax model has been in place since the 1950s. Those outdated models, spread across decades, have contributed to worsening income inequality in the state, according to a recent report from the Georgia Budget & Policy Institute.

“When you add it all up, of the changes that have been made over the last 20 years, on balance they tend to favor those with the highest incomes, corporations and draw towards white taxpayers rather than be fair across the board to all Georgians,” said Danny Kanso, author of the report.

ExploreGeorgia senators plan review to modernize tax code

Under Georgia’s income tax system, people with the lowest incomes pay a disproportionate share of their incomes in taxes. If you are in the bottom 20% of income earners in Georgia — less than $20,000 annually — you pay 10.4% of your income to state and local taxes. If you are in the top 1% of income earners — more than 481,000 annually— you pay about 7% of your income in state and local taxes.

For sales and use taxes, Georgia taxes most goods. But select grocery items are exempt. Most services are also exempt from taxation. Accommodations, in-state transportation, sales of admissions, and charges for participation in games and amusement activities are taxed. The system leaves sales tax more vulnerable to changes in economic conditions, Kanso said. It also gives preferential treatment to businesses and professional services.

I imagine some of you are in disbelief that we operate under tax code structures created more than 80 years ago. The world has changed. The economy has changed. But we haven’t accounted for those changes in the way taxes are applied, Kanso said.

First, let’s make sure we understand a little history of taxes in Georgia.

Georgia generated most of its revenue from state-owned railroads until 1843. One of the earliest non-railroad taxes was the poll tax — money paid in order to vote.

Formalized in 1804, the tax charged white males 31 cents to vote, according to the GBPI report. Three years later, the tax was revised so free people of color paid $4 to vote. By mid-century, the poll tax had decreased by almost a dime for white men and increased by one dollar for free people of color. Enslaved people could vote for the cost of $150 though it is unclear how they would do this since they weren’t paid any actual wages.

Under the 15th amendment, formerly enslaved men could vote. Georgia was the first southern state to institute a cumulative poll tax, which meant free Black men could vote, but only if they paid a lot of back taxes.

Georgia voters then added a literacy test to the mix so if you couldn’t read, like most Black people who had been denied an education, then you couldn’t vote. All the white men who couldn’t read could still vote if they had an ancestor who served in the Civil War or if they were previously registered to vote. Poll taxes stuck around until 1945, which means Baby Boomers were the first generation of Georgians born into a state without poll taxes.

By the end of the 19th century, property taxes were the largest revenue source for the state. In the early 1900s, the state tax assessor was valuing equal properties at different rates depending on who owned the homes.

Later that century, when white residents fled the city for the suburbs, the properties they left behind were devalued but the tax appraisals didn’t change. Residents who stayed in Atlanta, especially in neighborhoods with many Black residents, had to pay heavy taxes on overvalued homes. Georgians still have to contend with the lingering impact of these issues when paying county taxes, but the state stopped collecting property taxes in January 2016.

These days, the bulk of Georgia revenue comes from personal income taxes. Beginning in 1931, Georgia residents paid one-third of the tax rate paid in federal income taxes, according to GBPI report. By 1937, the state had introduced the six-bracket system that is still in use today. Of the states with a bracket structure, Georgia’s are among the most narrow which means that most residents, as in anyone with an income threshold over $7,000, pay the highest tax rate of 5.75%. That effectively makes it a flat tax.

“Most of the brackets we have in state law today were created in 1937 with income thresholds where you reach the top rate at $7,000 as an individual or $10,000 as a married couple,” said Kanso. “If the state simply adjusted to inflation those brackets would be $130,000 for individuals and $185,000 for a married couples and we would have a graduated system where as you earn more, you pay a higher rate.”

In 2019, the top bracket dropped from 6% to 5.75%. In March, Gov. Brian Kemp signed into law a tax cut which increases the standard income tax deduction.

ExploreKemp signs state income tax cut for many Georgians into law

But debates continue about whether to consolidate the old tier system and move to a flat, reduced tax rate or revise the tier system into brackets that tax higher earners at higher rates.

“A flat tax may sound simple but what it adds up to is low and middle income Georgians paying the most, as high earners, because of exemptions in the tax code, would be able to get that rate down more than the average tax payer,” Kanso said.

I’ll leave it to our elected officials to hash it out, but almost a century is a long time to wait for change.

Read more on the Real Life blog (www.ajc.com/opinion/real-life-blog/) and find Nedra on Facebook (www.facebook.com/AJCRealLifeColumn) and Twitter (@nrhoneajc) or email her at nedra.rhone@ajc.com.

About the Author

ajc.com

Editors' Picks