State tax cuts continue to arrive amid record budget surpluses, and the next to arrive may be in Georgia, which wants to follow fast-growing Sunbelt neighbors.
The State House recently approved a plan to cut income taxes by more than $1 billion. The bill consolidates six brackets into a single rate of 5.25% starting in 2024, removing the current maximum rate of 5.75%. This will make Georgia the 13th state to pass a flat tax, following Iowa’s 3.9% rate this month.
The plan makes it easier to file by canceling most deductions, but a healthy increase in the standard exemption will compensate. Single filers can exclude $12,000 of income, down from $2,700 currently, while the exemption for joint filers is increased from $7,400 to $24,000. House Speaker David Ralston said 95% of Georgians would pay less under the new plan.
One deduction exception is that filers age 65 and older will still be able to deduct $65,000 of retirement income, such as income from 401(k) distributions. A confusing downside is that the tax cut would not take place until 2024, meaning taxpayers would not benefit from it for two years.
Last week lawmakers also reached an agreement on the mid-year budget, which includes a separate dividend for taxpayers. Georgians will receive refunds of $250 per person on their 2020 and 2021 returns for a total cost of $1.1 billion. The one-time relief is a political gimmick that won’t do much for economic growth and the money would have been better spent on lowering tax rates. The tax proposal also leaves the current corporate tax rate of 5.7% untouched, which is a missed opportunity.
Like most states, Georgia has fiscal space for tax cuts because increased revenue produces a budget surplus. Revenue in 2022 is expected to exceed planned spending by $3.2 billion. Georgia’s economy has rebounded better than most since the pandemic shutdown. The state beat the national average for job growth, adding more than 210,000 in the past year. In January, Georgia surpassed its pre-pandemic employment level, joining a small club comprising Texas, Arizona, Idaho and Utah.
Republican Gov. Brian Kemp has a strong record as he runs for re-election. But he has a political incentive to support tax cuts. He faces a main challenge from former senator David Perdue, who wants to eliminate income tax. Republicans in the Legislature also need a political victory as they face a strong Democratic challenger for governor Stacey Abrams, who came close to winning in 2018.
Georgia’s tax rate is still higher than it should be to compete with Florida, which was among the 10 fastest growing states last year. Tax competition among states is accelerating, and smart political leaders will need to consider pro-growth reforms to keep pace.
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Appeared in the March 14, 2022 print edition.