The size of Georgia’s estimated windfall from the federal tax overhaul that Congress approved in December kept growing over the past month: first it was $3.7 billion over five years, then $4.7 billion, and by Tuesday, $5.2 billion.
So Gov. Nathan Deal was wary about moving to eliminate the windfall — essentially higher income taxes that Georgians would have to pay — because he couldn’t be sure of the numbers.
Yet when he and legislative leaders decided to act Tuesday, they went big: a plan that will not only wipe out the federal windfall, but cut taxes on Georgians by an additional $516 million over the next half-decade.
And in doing so, they held to a principle near and dear to conservative voters by proposing a cut in the top state income tax rate.
“There have been many, many times when we’ve been close to a significant tax cut, but we’ve never been able to reach an agreement,” said Lt. Gov. Casey Cagle, the Senate’s president and a leading candidate for governor this year. “Today, we are delivering a historic, conservative victory for Georgia families.”
The measure quickly passed the House Ways and Means Committee on Tuesday and should be up for a vote in the full chamber in the next few days.
“I want it to be on the governor’s desk as soon as possible,” said House Speaker David Ralston, R-Blue Ridge.
The plan would cut the top state income tax rate — the rate most Georgians pay on a majority of their income — from 6 percent to 5.75 percent starting next year.
The rate would be further reduced to 5.5 percent in 2020 if the General Assembly gives its OK, something that is almost certain unless there is a major recession.
In addition, the proposal would double the standard deduction for Georgians. For married couples filing joint returns, the deduction would go from $3,000 to $6,000.
Lawmakers have been debating cutting the state’s income tax rate for years, most recently during the 2017 session, when the House passed House Bill 329, which would have lowered the top rate from 6 percent to 5.4 percent. The measure eventually stalled when the two chambers couldn’t come to a final agreement.
The road to Tuesday’s announcement began in December, when Congress passed and President Donald Trump signed into law changes that guaranteed federal income tax cuts for many Americans.
The federal law produced a potential windfall for states because it limits or eliminates some of the deductions Georgians have used when figuring their state taxes in the past and made it far more likely that ratepayers will use the standard federal deduction, rather than lowering their state taxable income using itemized deductions.
So while many Georgians will pay less in federal taxes, at least some could have wound up with bigger state tax bills unless lawmakers made changes in Georgia’s tax code as well.
The estimated windfall escalated several times as state officials tried to figure out the impact of the federal law.
Deal initially said he wanted lawmakers to wait until the state’s 2019 legislative session to figure out how to address the windfall because the state can now only estimate the impact of the federal law. But Deal changed his mind after lawmakers — most of whom are either running for higher office or seeking re-election this year — began calling for tax cuts.
State income taxes are the single biggest source of revenue for the state, and officials in the Deal administration initially said the governor would likely fight any effort to cut the rate and veto any bill that contained rate cuts.
But lawmakers are squeamish about the prospect of running for re-election this year after passing a plan that doesn’t wipe out the windfall because they could be accused of raising state taxes. Leaders in both chambers called for a cut in the income tax rate, and Deal said he was eventually convinced it was doable without shortchanging future state budgets.
“I wanted to be certain that the numbers could be verified as nearly as possible to be able to justify a rate reduction,” Deal said. “I think our growth will hopefully more than make up the difference (in revenue) here.”
The net effect to state revenue — $516 million over a little more than five years — is about a $100 million cut per year. Most years state tax collections increase $750 million to $900 million from economic growth alone, so supporters see the cut as fiscally reasonable.
The governor said state corporate income tax rates haven’t changed since 1969, and individual income tax rates have been the same since 1937. The standard deduction hasn’t changed since 1981. If the deduction for a married couple were adjusted for inflation since then, it would be worth about $8,500.
Still, some concerns are likely to be raised about the speed of the decision to cut taxes, and the potential long-term impact. Several lawmakers were around the Capitol in 2008-2010, when the Great Recession pummeled state finances.
“The main concern is that the rush to cut personal income taxes, particularly to draw down the top rate so much this year, carries a lot of risk of unintended consequences,” said Wesley Tharpe, the research director for the left-leaning Georgia Budget & Policy Institute.
“The revenue estimates on this are ballpark figures because of the complexity of the state-federal tax interaction, and we could be seeing things such as additional federal budget cuts over the next few years or the inevitable recession coming somewhere down the road,” he said.
The Ways and Means Committee didn’t seem concerned. It passed the plan without any debate.
Besides the rate cut and increased deduction, House Bill 918 also includes a provision in earlier administration legislation to exempt jet fuel from state and most local sales taxes.
Doing so would cut airline and cargo fleet sales taxes by more than $50 million a year. Delta Air Lines and Southwest Airlines have both had lobbyists at the statehouse pushing for the tax break, which they say will help Atlanta better compete with other major hub airports that don’t charge sales taxes on jet fuel.
Clayton County officials had voiced opposition to the exemption because local governments would lose millions of dollars in sales tax revenue. State lawmakers from the county surrounded the podium at the Capitol on Tuesday as Deal announced his proposal.
Officials in the Deal administration said the state will provide grants or other funding to Clayton and other local governments to make up for any lost revenue.