Georgia’s tax-cutting binge may come with a cost

More tax cuts are planned over the next two years, and a bill pending in the General Assembly would further reduce tax rates in the years ahead.

The moves come as neighboring North and South Carolina and other states also are lowering their tax rates. Some Georgia Republican lawmakers say they must continue to cut taxes to remain competitive and attract businesses and workers.

“It’s part of the overall competitiveness of the region,” said Rep. Shaw Blackmon, R-Bonaire, chairman of the House Ways and Means Committee. “We believe that people spend their money better than the government does.”

Critics say Georgia’s tax-cutting binge may already have gone too far. They fear budget cuts in Washington and a possible tariff-induced recession could force lawmakers to slash critical services or add a sales tax on services from haircuts to health care. Those new taxes would hit low-income Georgians hardest.

“That’s where I worry,” said Sen. Sonya Halpern, D-Atlanta, a member of the Senate Appropriations Committee. “If you don’t have a replacement (tax), how are you going to be able to provide those services?”

The race to cut taxes is unlikely to abate anytime soon. Lt. Gov. Burt Jones, a likely candidate for governor next year, and other elected Republicans want to eliminate the income tax altogether.

That may make income taxes a top campaign issue in Georgia next year — along with tariffs, the economy and federal budget cuts.

A century of income taxes

Georgia first imposed an income tax on individuals and corporations in 1929 as a way to raise cash during the Great Depression. That was 16 years after the federal government established an income tax as part of the 16th Amendment.

For most of its existence, Georgia’s individual tax was “progressive” — people who earned more paid a higher tax rate. The thinking — mirrored in the progressive federal income tax — was that people who earned more could afford to pay a higher rate, and low-income people should pay a lower rate because they spend a higher share of their earnings on life’s necessities.

Then, in 2022, the General Assembly reduced the state’s six individual income tax brackets to a single flat rate of 5.49%, effective in 2024.

The legislation laid out a schedule to reduce the rate gradually to 4.99% by 2029 if the state met certain financial benchmarks. And it raised standard income tax exemptions over time.

Last year, legislators also lowered the corporate income tax rate to match the individual rate.

At the time, supporters said the single flat tax rate for personal and corporate income would simplify the state’s tax structure and encourage businesses and workers to move to Georgia. Opponents said it would shift the tax burden to the middle class and cost the state billions of dollars in future revenue needed for services.

But the impact of the legislation was overshadowed by other developments.

Federal spending skyrocketed amid the coronavirus pandemic. Georgia’s economy boomed in the wake of the pandemic. Sales tax revenue grew as inflation increased prices.

Georgia found itself rolling in money. By last year, state reserve and “rainy day” funds rose to $16.5 billion — enough to pay for nearly half a year’s state spending.

Flush with cash, legislators approved several income tax refunds, including one this year. They also twice accelerated the income tax rate cuts. Under House Bill 111, approved this year, the rate would fall to 4.99% by 2027 instead of 2029.

When he signed the legislation, Kemp attributed the tax cuts and rebates to Georgia’s decision to keep a tight rein on spending.

“Here in Georgia, we safeguard every dollar of taxpayer money, because we know it belongs to the people, not the government,” Kemp said.

Tax-cutting competition

Georgia isn’t alone in cutting taxes. Numerous states across the country are doing the same, including some of Georgia’s neighbors.

North Carolina has been cutting income taxes for years and plans to reduce its rate to 3.99% next year. South Carolina legislators are considering a bill that would reduce the state’s progressive income tax to two tiers with an eye toward eliminating the income tax altogether.

Some Republicans say Georgia must keep cutting to remain competitive. They note that two of Georgia’s neighbors — Florida and Tennessee — don’t have income taxes at all.

Blackmon’s proposal, House Bill 880, would reduce Georgia’s income tax rate to 3.99% by 2037 if the state meets certain financial targets. It would also boost the cap on the state’s “rainy day” fund — money set aside to cover unexpected shortfalls — to 50% of the previous year’s net revenue, up from 15%. And any amount exceeding 25% of the previous year’s net revenue could be used for tax relief.

Blackmon said HB 880 is “intended to be a responsible way to continue to keep taxes low and make them lower.”

Some Democrats and liberal groups worry Georgia has already cut taxes too much.

Danny Kanso, senior fiscal analyst for the Georgia Budget and Policy Institute, said Georgia taxes are already low compared to other states. Georgia ranked 44th in per capita state taxes in 2022, the most recent data available, according to a recent report by the Georgia State University Fiscal Policy Center. And that was before its recent tax cuts.

He noted that several of Georgia’s neighbors — Alabama, North Carolina and Tennessee — have higher state tax burdens.

That underscores a financial reality, Kanso said: Government services cost money, and it must come from somewhere. In states without an income tax, such as Tennessee, higher sales and other taxes fill the gap.

Winners and losers

What’s more, cutting taxes for one group sometimes means raising them on another, as South Carolina legislators have learned.

Last month a state analysis of their initial tax-cutting plan found about 60% of South Carolina residents would pay higher taxes. That’s because lawmakers’ flat-tax proposal would have raised rates for many residents in lower tax brackets.

South Carolina lawmakers have since revised that plan, but 24% of South Carolinians would still pay more under the latest proposal.

Georgia tax cuts also could have winners and losers.

Kanso’s analysis of the state’s most recent income tax rate cut found it will primarily benefit the wealthy. Meanwhile, he said low-income Georgians could face a heavier tax burden if legislators raise sales taxes to make up for lost income tax revenue.

Georgia exempts most services from sales taxes, as well as groceries and prescription drugs. It also exempts a slew of other activities and products from taxes.

Sen. Blake Tillery, R-Vidalia, chairman of the Senate Appropriations Committee, highlighted the cost of many of those exemptions in a senate budget proposal in March. He said he did it to make a point: If legislators want to eliminate the income tax, they need to have an honest conversation about tax exemptions.

“We spend a whole lot of time figuring out which special interest group doesn’t have to pay taxes,” he said. “I’m more interested in lowering taxes for everyone.”

Tillery’s list includes exemptions and credits for everything from lottery tickets ($285 million) to film production ($887 million) to energy and equipment used in manufacturing ($4.9 billion). But the biggest breaks by far are the sales tax exemptions for services — everything from health care to haircuts ($12.3 billion).

Tillery said that’s just a short list. By his tally, the state foregoes more than $40 billion in revenue each year because of tax exemptions — more than the state’s $37.7 billion budget.

Georgia expects to raise $15.7 billion from the individual income tax in fiscal 2026 — by far the state’s largest source of income — plus another $3.3 billion in corporate taxes. The next-largest source of revenue is the sales tax, at $9.4 billion.

Halpern, the Democratic senator, doubts Georgia can eliminate the income tax without also eliminating major sales tax exemptions and harming low-income people.

“Everybody’s got to buy things,” she said. “But for the people who make the least, they’re least able to afford those increases.”

Even some conservatives are skeptical. Kyle Wngfield, president of the Georgia Public Policy Foundation, favors whittling away at the income tax to make it as low as possible. But he doubts it can be eliminated.

“It’s unclear that you can get there without making some of those trade-offs,” Wingfield said. “And then you’d have to dig into whether that would be worthwhile.”

Still, Jones is advocating for eliminating the income tax as he considers a run for governor next year. When Kemp signed the most recent cuts, Jones said they “bring us one step closer to eliminating the state income tax, a priority I have always been a proponent of.”

Tillery, who might run for lieutenant governor, also supports the idea. So far, no one has offered a specific proposal. But Tillery said he wants a serious discussion of the trade-offs.

“I think it’s fair to say I’m trying to push forward the conversation,” he said.