Income tax reform in Georgia would improve competitiveness
This year’s state legislative sessions have been characterized by a focus on tax policy, with five states having already enacted significant personal or corporate income tax reform. Georgian lawmakers are not interested in being left behind.
While HB 1437 was previously a fictitious bill, the sponsors now have share their plan to consolidate Georgia’s six personal income tax brackets into one and lower the rate from 5.75% to 5.25%, beginning with the 2024 tax year. The bill would also eliminate the standard deduction for all taxpayers, instead increasing the personal exemption from $2,700 to $12,000 for single filers and from $3,700 to $24,000 for married filers jointly.
The benefits of a 5.25% fixed income tax would be reflected in Georgia’s ranking on our State enterprise fiscal climate index, an annual comparison of the competitiveness of state tax structures. Currently, Georgia ranks 32n/a in total among the States, and 35and in the personal income tax component. If the changes proposed by HB 1437 were in place today, the state would rank 16and in total and 12and on personal income tax – a significant improvement as the state overtakes many mid-tier states with graduated rate taxes and top rates just below 6%.
Georgia faces fierce competition from its neighbors when it comes to personal income tax. Tennessee and Florida have no income tax, and Alabama and North Carolina levy maximum rates of 5% and 4.99% respectively.
Beyond rate considerations, moving from a progressive to a flat tax improves the economic competitiveness of the tax and, based on the experiences of other states, serves as a buffer against future rate increases. In times of high inflation, this also solves a problem with the current system. Currently, Georgia’s range thresholds are fixed dollar amounts that are not linked to inflation. This means that as the actual dollar amount of income increases, more of that income falls into higher tax brackets, even though the taxpayer’s purchasing power remains the same. By eliminating bracket thresholds altogether in favor of lower rates, lawmakers would avoid a path of future non-legislated tax increases.
However, lawmakers could go even further to protect Georgians from unintended tax increases. The personal exemption, which this bill adjusts, is also not indexed to inflation. This means that the value of the exemption decreases in concert with the value of the dollar, exempting a smaller percentage of residents’ incomes over time. At the same time, lawmakers are adjusting the personal exemption that they should consider indexing it to inflation.
Moving from a graduated tax to a flat tax also eliminates Georgia’s “marriage penalty”. Under the current system, bracket thresholds are not doubled between single filers and those filing jointly, so married filers see more of their income subject to higher rates than single filers. Because the flat tax removes these brackets completely and because the bill ensures that the standard deduction is doubled for joint filers, the proposed bill eliminates the marriage penalty.
If HB 1437 were enacted, the changes would cost the state about $1 billion a year. This is not a small sum, but the Georgian state economist predicts that State revenue will increase of at least $1 billion per year between fiscal year 2023 and fiscal year 2027. Between fiscal years 2019 and 2021, total tax revenue increased by more than 10% and income tax revenue increased by almost 17%. The state also sits on a large surplus, although some of this comes from one-time rather than recurring revenues. However, projected year-over-year revenue growth of $1 billion per year gives Georgia more than enough room to cut taxes while preserving substantial growth — more than $3 billion in above baseline by FY2027 – for other government priorities. Even at a cost of $1 billion a year, the state budget would have to grow significantly, with lawmakers simply returning some of that growth to taxpayers in the form of rate cuts.
In an era of increased mobility and tax competition, a lower rate and simpler tax structure would help Georgia stand out among states. Lawmakers would be wise to consider reforming state income tax to improve state competitiveness.