Taxes Agenda Reduce Georgia s overall tax burden Minimize Georgia s reliance on the income tax Encourage, where possible, low tax rates and a wide tax base by limiting exemptions Eliminate the discriminatory aspect of the insurance premium tax Compete for corporate headquarters Facts Georgians are paying about $2 billion less than they would have absent any tax reduction. However, even with these cuts, Georgia s budget from FY 1991 to FY 2003 outpaced the increase in inflation and population by 5.6 percent or $780 million. 1 Of the 50 states, Georgia s per-capita tax burden is 28th highest for state and local taxes. (Georgia ranks 39th highest when comparing state taxes only, but combining state and local taxes provides a clearer picture for many reasons, including the fact that states differ in how they fund, locally or at the state level, many activities such as education and health care.) 2 Georgia ranks 34th highest when state and local charges, fees and other sources are added to tax revenues. 3 Georgia s 2004 tax burden, total federal, state and local taxes divided by personal income, was 27.3 percent, ranking it 21st highest according to the Tax Foundation. 4 Georgia ranks 25th in the Tax Foundation s State Business Tax Climate Index, which measures the impact on business of five major elements of the tax system: the percentage of income taken by all taxes, individual income tax rates, corporate income taxes, the sales tax rate and the complexity of the tax system. Neighboring states ranked as follows: Tennessee (10th), Alabama (16th), Florida (7th), South Carolina (26th) and North Carolina (24th). 5 Contrary to common perception, Georgia does not impose an estate tax in addition to the federal estate tax. Georgia simply takes advantage of a provision in the law that allows the state to keep a portion of the federal tax. Changing this practice would not reduce the estate taxes paid by Georgians. Overview Economist Richard Vedder of Ohio University, who works in the area of tax policy as it relates to economic growth, has developed several conclusions based upon his research. The following are suggested tax policies that create incentives for economic growth: Keep the overall tax burden low and government expenditures modest. (Georgia s overall state tax burden ranks 39th, while total combined state and local taxes rank 28th.) Make relatively heavy use of sales tax and other forms of consumption taxation, and make little or no use of income taxation. Try to keep property tax burdens moderate as well. (Georgia s individual income tax revenues rank 20th, while corporate income tax revenues rank 25th. Combined state and local property taxes rank 34th. State and local general sales tax revenues rank 15th.) De-emphasize a reliance on federal grants-in-aid. (Georgia s per-capita state and local federal revenues rank 37th.) As much as possible, charge user fees directly to those who use government services. (User fees [referred to as charges by the Census Bureau] at the combined state and local level rank 31st.) 88
The Evergreen Freedom Foundation suggests the following principles: 1. Users of a government service should be charged user fees to pay for the service. 2. Non-user fees should apply equally to all taxpayers. 3. Taxes should not be collected to provide services that are not core functions of government. 4. Tax policy must be kept simple and not punish the economic success of individuals or businesses. As Georgia attempts to balance the needs of financing government programs while encouraging economic growth, these policies could provide a useful guideline in evaluating tax policy options. Agenda Reduce Georgia s overall tax burden Numerous studies show that strong economic growth is associated with low tax burdens. For example, a 1996 study by the Federal Reserve Bank of Atlanta examined state economic performance from 1960 to 1992 and found that Tax rates [average and marginal] are negatively related to growth and are sufficiently variable over time to reasonably explain variations in growth rates. 6 From FY 1992 to FY 2002, Georgia taxes at all levels increased relative to other states. State taxes per capita rose from 40th to 39th, local taxes per capita from 29th to 21st, and combined state and local taxes per capita from 34th to 28th. If Georgia does not curtail this increase in taxes, it will lose the competitive tax advantage it has enjoyed for many years. Minimize Georgia s reliance on the income tax Georgia has been economically competitive because of its overall low tax rates, but any tax reduction opportunities should focus on reducing Georgia s reliance on the individual income tax. This is particularly important because many small businesses, which create the majority of the jobs in Georgia, are organized as sole proprietorships, partnerships or S-Corporations that pay taxes based on individual income tax rates, not corporate tax rates. Several of Georgia s economic competitors have eliminated their individual income tax, including Florida, Nevada and Texas. 7 From 1991 to 2001, Nevada led the nation in job creation, Florida ranked 6th, Georgia 7th and Texas 8th. Of all types of taxes, the income tax is the most harmful to economic growth because it provides a disincentive for productive effort. Studies show a negative relationship between income taxes and economic growth. A study by the Joint Economic Committee of Congress examined the economic growth records in the 10 states that had raised income taxes the most in FY90 through FY93 and the 10 states that had cut income taxes the most over that same period. The top-10 income tax hiking states experienced cumulatively the net loss of 182,000 jobs, a 2.3 percentage point increase in the unemployment rate and a $613 real decline in personal income per family of four. The top 10 income tax cutting states gained cumulatively 975,000 net new jobs, an increase in the unemployment rate of only 0.3 percentage points and a $148 real increase in personal income per family of four. 8 Encourage, where possible, low tax rates and a wide tax base by limiting exemptions As more and more exemptions are granted, Georgia s property, sales and income tax bases erode. This results in lower tax revenues and higher than necessary tax rates. Georgia should at least refrain from granting any further exemptions and make use of opportunities to broaden the tax base and lower rates. Like many states, Georgia excludes a significant portion of income of the elderly. This is accomplished through the full exclusion of Social Security benefits and a $14,000 per-person exclusion of other forms of income. Tax 89
treatment of the elderly results in projected state income tax revenues for 2005-2015 that are at least 6 percent lower per year than would be the case without the specialized treatment. In FY 2001, this would amount to $415 million, or 60 percent of the revenue from the state corporate income tax. 9 The policy guiding this favorable treatment is based upon the assumption that the elderly are on a low, fixed income and are deserving of this special treatment. However, many members of the Baby Boom generation are retiring with much higher incomes. Therefore, upon further study it may be appropriate to revisit this policy. The other side of this argument is that Georgia does not attract as many higher-income retirees as it could because of its tax policy. In part to address this concern, the General Assembly has recently increased the retirement exclusion. For taxable years beginning on or after Jan. 1, 2006, and prior to Jan. 1, 2007, the retirement exclusion increases to $25,000. For taxable years beginning on or after Jan. 1, 2007, and prior to Jan. 1, 2008, the retirement exclusion increases to $30,000 and increases to $35,000 for taxable years beginning on or after Jan. 1, 2008. For more information, see Barbara Edwards and Sally Wallace, How Much Preference: Effective Personal Income Tax Rates for the Elderly, Fiscal Research Program, Andrew Young School of Policy Studies, Georgia State University, April 2002. Eliminate the discriminatory aspect of the insurance premium tax In lieu of paying corporate income tax, insurance companies pay a tax on their premiums. There are currently three rates. Companies with at least 75 percent of their assets in Georgia are eligible for the lowest rate, companies with at least 25 percent of their assets in Georgia pay the middle rate, and all other companies pay the highest rate. This would seem to make sense at first glance, but other states have caught on to this game. In retaliation, these states charge Georgia-based companies a higher rate for premiums written in their states. This resulted in at least one high-profile change of corporate domicile several years ago when AFLAC relocated its insurance subsidiary to another state, even though it continues its operations in Georgia. AFLAC s taxes in Georgia have not changed, but the move has saved them more than $14 million in taxes paid to other states since the move. Compete for corporate headquarters Sophisticated tax planning, such as the use of offshore corporations or Delaware Holding Companies, is often employed by large corporations to transfer income from a state with a corporate income tax to one without the tax. Essentially the offshore company or the Delaware Holding Company is set up as an owner of a set of intellectual property rights such as logos, patents or other trademarks. When a domestic company employs these licenses, they must pay the owner a fee. This fee is tax-deductible to the domestic company and thus profits can be transferred to a non-taxing jurisdiction though a licensing fee. 10 In lieu of the recent financial scandals among Fortune 500 companies, the state should exercise caution in making any changes that could weaken the ability of shareholders to hold corporate management accountable. At the same time, where it is possible to modify tax laws to create incentives for corporations to incorporate in Georgia without weakening these shareholder protections, Georgia should aggressively pursue those options. With Atlanta s status as an international city, a telecommunications and transportation hub and home to an impressive array of major corporations, Georgia could be very competitive. 90
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* Higher rank equals higher amount. Includes 50 states District of Columbia excluded. Per-capita amounts calculated using April 1, 2002, U.S. Census population for each state. For a breakdown of state and local revenues, see http://www.census.gov/govs/estimate/0211gasl_1.html. Endnotes 1. -Allan Essig, Twelve Years of Budget Growth: Where Has The Money Gone? Fiscal Research Program, Andrew Young School of Policy Studies, Georgia State University, July 2003, http://frp.aysps.gsu.edu/frp/frpreports/report_84/index.htm. 2. U.S. Census, FY 2002. 3. Ibid. 4. http://taxfoundation.org/. 5. 50-State Comparison of Business Tax Climates, http://www.taxfoundation.org/pr-businesstaxclimate.html. 6. Zsolt Becsi, Do State and Local Taxes Affect Relative State Growth? Economic Review 18, no. 2 (March April 1996). 7. http://www.taxadmin.org/fta/rate/ind_inc.html. 8. Richard Vedder, State and Local Taxation and Economic Growth: Lessons for Federal Tax Reform, Joint Economic Committee of the U.S. Congress, December 1995. 9. Sally Wallace, The Georgia Individual Income Tax: Issues and Options, Fiscal Research Program, Andrew Young School of Policy Studies, Georgia State University, April 2002. 10. Martin F. Grace, The Georgia Corporate Income Tax: Issues and Options, Fiscal Research Program, Andrew Young School of Policy Studies, Georgia State University, April 2002. 92