It didn’t happen this legislative session, but the day is coming when state lawmakers will address — in a comprehensive way — the Georgia income tax.
What that will mean to you depends on where you fall on the income scale, and that's something House Ways and Means Chairman Jay Powell knows all too well.
Georgia has had a graduated income tax structure, which means a lower rate for the poor and a higher rate for the rich.
Some people think that’s unfair, arguing that everybody should pay the same percentage of their income in taxes, regardless of how much they make. Moreover, some believe you cannot effectively lower the overall income tax burden without doing away with the graduated structure.
Powell, R-Camilla, is in that camp. But he also understands that instituting a single rate large enough to fund state government would mean a massive increase in income taxes on the poor. Politically and practically, that doesn’t work.
“You don’t want to give a tax cut to someone making $80,000 on the back of someone earning $20,000,” he said.
That concern reflects the views of those who favor the state’s traditional graduated plan as part of a balancing act that ensures blue collar workers don’t get crushed.
Powell thought he had that balance in House Bill 329, a plan that stripped the state tax code of its various levels and replaced it with a single 5.4 percent rate. That's a nice cut for top earners but it represents a huge increase for people at the bottom.
How a graduated tax works
Here’s the cocktail napkin version of how the state income tax works (for simplicity, we’ll use the bracket for “married filing jointly”):
For the first $1,000 earned, everybody pays a marginal tax rate of 1 percent. The rate goes up to 2 percent for every dollar over $1,000. At $3,000, the rate jumps to 3 percent; at $5,000 the rate hits 4 percent; at $7,000 the rate is 5 percent.
The rate is 6 percent once you reach $10,000 for the tax year. Every dollar you earn after that is taxed at that top rate.
The thing is poor folks may not earn all that much more, but rich people keep on paying that top rate on every dollar after $10,000.
Powell’s plan would have everybody pay 5.4 percent starting at the first dollar. So that’s a large increase for someone making a little bit of money, but it’s a healthy cut for someone who makes a lot.
To balance it out, the bill created an earned income tax credit that would allow lower-income Georgians to roll back much of the increase. Estimates of the cost of the plan ranged from $78 million to $154 million, with most of the savings going to the wealthy.
Bigger impact on low earners
Wesley Tharpe, research director for the left-leaning Georgia Budget and Policy Institute, said Powell’s plan was something of a mixed bag. Tharpe said the tax credit would help working families, but doing away with the graduated income tax would hurt by removing the “structural protection” the state has always provided to those at the bottom of the pay scale.
To understand Tharpe's position, you have to look beyond the income tax to all the other ways the state gets money from its citizens. While Georgia is one of the lowest tax states in the nation (a study released this week by Wallethub.com ranked Georgia 32nd in the nation for total tax burden), Tharpe said lower-income Georgians end up losing a greater percentage of their paychecks to taxes that are already flat.
That includes sales taxes, the laundry list of government fees, and property taxes, none of which take income into account. Billionaire to beggar, everybody pays the same tax rate on a Twinkie, but it doesn’t affect them equally.
“The income tax provides some offset to that inherent regressivity,” Tharpe said.
That's the problem Tharpe has with studies like the Wallethub.com survey. That 50-state look at state taxes found Georgia has a tax burden of 8.2 percent of individual personal income. The Washington, DC,-based financial services website ranked Georgia slightly better than Arizona and just behind Washington state.
When I tweeted out those findings, Tharpe was quick to reply that the study's findings are very broad and need context. Tharpe pointed to the long-running "Who Pays?" series from the liberal nonprofit Institute on Taxation and Economic Policy, which looks at tax burden as a share of income.
For Georgia, the institute found the bottom 20 percent of taxpayers pay 10.4 percent of their income in taxes, compared half that for the 1-percenters earning $432,000 or more.
‘First step…most difficult’
Part of Powell’s interest in flattening the income tax is to make it easier to reduce the rates later. Right now, the income tax is complicated, but a single rate would fix that. At the risk of oversimplifying a complex idea, the state would have a single lever to pull to lower or even raise the rate as needs may occur.
A blue-ribbon tax commission tried to do something like that in 2011, but it also tried to eliminate dozens of tax credits, exemptions and deductions. The plan gored every ox in sight. Lobbyists howled and legislators took a giant step back.
Powell saw HB 329 as a more modest approach. A first step.
“The first step is always the most difficult step,” he said.
The bill passed the Republican-dominated House easily, but bogged down in the also Republican-dominated Senate. A Senate version of the bill gave across-the-board tax breaks but did not eliminate the graduated system. That more costly version of tax relief likely would have earned a veto from Gov. Nathan Deal, who worried about the bill's effect on state revenue.
Powell plan coming back
Powell is disgusted with the outcome, but he said he is definitely bringing the plan back.
“No question,” he said. “The plan took a little tweaking because we fooled around with the credit, but it’s a good, solid plan.”
But he said it may take longer than he hoped and it may take some new blood.
“I don’t know until after the elections are over next year if there is any point in trying to make that effort,” he said. “What I saw this year was more politics than rational study.”
The Legislature did manage to get some work done on taxes, but it’s exactly the kind of work that the 2011 commission wanted to eliminate.
As they usually do, lawmakers passed industry specific tax breaks that were justified as job creators. Notably, one gives a break to luxury boat owners who have their yachts repaired in Georgia. That work is not being done in Georgia, but the hope is the tax incentive will create a market for it.
Tharpe said this kind of break is easily justified but the state does a poor job of following up to determine whether they actually produce the jobs they claim.
“In some ways there is just a lot of inertia there. It’s a long-term way of doing business,” he said.
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