To rise, or not to rise: that is the question.
No, I don’t mean the Atlanta Falcons, who blew their chance to “rise up” this season. Rather, I’m talking about whether the state of Georgia will maintain its upward trajectory in economic competitiveness.
A key measure of our progress, the Tax Foundation’s State Business Tax Climate Index, was updated earlier this month. The good news: Georgia rose four spots in the new edition, the third-largest gain of any state.
The bad news: Even that improvement left us ranked a middling 32nd.
The states we climbed over are not exactly a hotbed of competitiveness: Illinois, Kansas, Maine and Massachusetts. You deserve a prize if you guessed even debt-ridden Illinois and “Taxachusetts” had better business tax climates than Georgia until this year.
How does the Tax Foundation, a nonpartisan group based in Washington, D.C., arrive at these rankings? It considers five key types of taxes: corporate taxes, individual income taxes, sales taxes, property taxes and unemployment insurance taxes. It ranks each state on each type of tax, then compares them overall.
It turns out that Georgia is better than the median state on only one of these: corporate taxes. With 1 being best and 50 being worst, we rank 36th in individual income taxes, 29th in sales taxes, 28th in property taxes and 39th in unemployment insurance taxes.
Our ranking improved by two spots on corporate and individual income taxes, both tied directly to the changes the General Assembly passed in 2018. Lawmakers were reacting to the federal Tax Cuts and Jobs Act of 2017, which eliminated many of the federal deductions that Georgia simply adopts and consequently would have increased state taxes by more than $1 billion per year.
Recall what happened in the state bill: First, effective last year, the standard deduction was doubled, reducing tax bills for the majority of Georgians who don’t itemize their deductions. Second, effective this year, the top income tax rate was cut for the first time, from 6% to 5.75%, saving money for all single taxpayers with more than $7,000 of taxable income ($10,000 for married couples).
Yet, until now the net result from the state and federal laws was an increase in state taxes. That’s right: Georgians this year are expected to pay more than $100 million more in state income tax than they would have otherwise (apart from the effect on federal taxes).
At the state level, all of this tax reform — the changes, remember, that led to that welcome improvement in our state business tax climate — won’t become an actual tax decrease unless the General Assembly follows through with the third part of its package: a further reduction in the top income tax rate, to 5.5%.
Only then would the net impact on state revenues turn negative for the year. Even then, the impact is expected to dissipate over the course of a few years.
Given the sudden narrative that this tax cut is the reason Gov. Brian Kemp has ordered some state agencies to cut their budgets, bear this in mind: The total impact of that third tax change is less than the total of the potential spending cuts.
In fact, the total of the potential cuts is much more comparable to the amount legislators approved this year for Kemp’s $3,000-per-year pay raise for teachers.
It remains unclear if the total state budget is actually going to decline. It is possible the spending cut in one place will be redirected to higher priorities — for example, the other $2,000 per year Kemp has promised teachers.
Far from arguing for scrapping the rest of the state’s tax reform, the lesson here is the state can achieve multiple objectives at once. Georgia can find efficiencies, re-prioritize spending and provide a modest amount of tax relief for citizens. It’s about time opponents explained why they think taxes should instead go up — while Georgia’s competitiveness takes a tumble.
Dalton native Kyle Wingfield is president and CEO of the Georgia Public Policy Foundation (www.georgiapolicy.org).