If Georgia eliminates the income tax, there are costly tradeoffs to consider

On July 17, Georgia Lt. Gov. Burt Jones announced the creation of a Georgia Senate committee to study eliminating Georgia’s income tax. This is not a new idea; it has been discussed for nearly two decades.

Not having to pay the income tax may sound just delightful, but there are consequences. In particular, Georgia will have to cut its services and/or increase revenue from other sources.

There is no free lunch.

There are nine states without an income tax, or at least without a personal income tax:

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

(New Hampshire only recently eliminated its income tax so recently that data in this essay comes from the other eight).

Proponents ask, if those states can operate without an income tax, why can’t Georgia? Georgia could, but does it make sense?

Nonincome tax states have higher sales and property tax rates than Georgia

Should Georgia cut state expenditures in order to eliminate its income tax? According to the most recent census data, Georgia ranks 49th in state expenditures per capita, and recent cuts to the federal budget will pressure Georgia to increase state expenditures.

David L. Sjoquist is an emeritus professor of economics and faculty affiliate in the Center for State and Local Finance in the Andrew Young School of Policy Studies at Georgia State University. (Courtesy of Carolyn Pruden Richardson/Georgia State University)

Should Georgia cut state expenditures in order to eliminate its income tax? According to the most recent census data, Georgia ranks 49th in state expenditures per capita, and recent cuts to the federal budget will pressure Georgia to increase state expenditures.

The biggest difference between Georgia and these other states is that they generate substantially more revenue per capita from sales and gross receipt taxes than Georgia. These states have higher sales tax rates and tax a broader range of goods and services.

They have larger per capita incomes, which yield larger potential sales tax bases. Florida, Nevada and Texas have more tourists, which expands their sales tax bases. Florida, for example, has a state sales tax that is 50% greater than Georgia’s but raises more than double the sales tax revenue per capita.

Nevada, Tennessee, Texas and Washington also have gross receipt taxes, which are taxes imposed on the seller for all or most of the sales that occur in the state. Washington has a sales tax rate of 6.5% compared with Georgia’s 4% rate, but Washington’s per capita sales and gross receipts tax revenue are about 3.6 times Georgia’s sales tax revenue per capita.

Back-of-the-envelope calculations suggest that Georgia would have to increase its current 4% state sales tax rate to 11% to replace the personal income tax revenue, and to nearly 13% if Georgia were to also eliminate its corporate income tax. On top of that would be the local sales tax, which is 3% or 4% for most Georgians.

Georgia could slow its tax revenue growth by axing the income tax

What are the likely effects of eliminating the state income tax and increasing its sales tax?

First, it would likely result in much slower growth in tax revenue.

Over the past 30 years, I calculated that Georgia tax revenue per capita, adjusted for inflation, decreased by about 17% for the sales tax but increased by 66% for the income tax, not accounting for changes in tax base definitions or reductions in the income tax rates. This would likely require frequent increases in what goods and services are taxed and the sales tax rate.

Second, it would result in a significant decrease in tax equity since the benefits of eliminating the income tax accrue more to higher income households while the cost of a sales tax increase falls more on lower income households.