The Georgia Special Council on Tax Reform and Fairness for Georgians (the “Special Council”) was created last year to perform a “systematic study of the State of Georgia’s revenue structure” and to make recommendations for changes to Georgia’s tax structure.1 This advisory summarizes the Special Council’s recommendations with respect to personal income taxes, corporate income taxes, sales and use taxes, and a number of other taxes.2
Personal Income Taxes
Under the current Georgia tax code, Georgia has an essentially flat six percent personal income tax, as single and joint filers reach the highest tax bracket at only $7,000 and $10,000 in taxable income, respectively. In its current form, the personal income tax accounts for nearly 50 percent of Georgia’s annual tax revenues—a high percentage that is a significant source of concern for the Special Council, which is interested in creating a more stable tax structure for the state that is less dependent on volatile economic cycles. Therefore, the Special Council recommends the following:
1. Reduce the number of adjustments from the starting point of federal adjusted gross income (AGI).
The Special Council recommends the elimination of all existing adjustments to federal AGI, with “limited” exceptions. One exception that the Special Council would keep is the add-back of interest and dividends from all municipal obligations except for Georgia municipalities or subdivisions. Furthermore, the Special Council would not make any changes to the existing adjustments used to compute income from pass-through entities. The Special Council takes particular issue with Georgia’s existing exclusions for retirement income. Thus, the Special Council recommends that (1) the phased-in exclusion for retirement income (set to begin in 2012) should be repealed and (2) the existing exclusion limit of $35,000 should be phased out over time.
2. Eliminate the personal exemption and standard deduction.
3. Sunset (or immediately eliminate) all existing credits and replace them with a refundable credit that phases out as taxable income increases.
The Special Council recommends that all existing personal income tax credits be set to “sunset” in 2014 (except the credit for taxes paid to other states and the federally funded credit for certain energy- and water-efficient products, as well as the “angel investor credit,” which already has a sunset provision). The Special Council also recommends that Georgia reinstate a low-income tax credit and make it refundable.
4. Reduce the current six percent income tax brackets over time to a flat tax rate of four percent, effective January 2014.
This proposal is likely the boldest recommendation of the Special Council. It is very unlikely that Georgia could pass such a severe cut in personal income tax rates in the current budget climate; accordingly, the Special Council allows that the legislature could “defer” the effective date of the rate reduction “in the event that economic conditions cause tax revenues to grow more slowly than anticipated.”
Corporate Income Taxes
Georgia currently imposes a flat corporate income tax at the relatively low rate of six percent,3 and it requires multistate corporations to apportion their income to Georgia using a single sales factor apportionment formula.4 However, the report notes, Georgia’s corporate income tax applies only to C corporations, while other business forms (i.e., partnerships, LLCs and S corporations) are taxed at the partner or member level. Thus, one of the Special Council’s goals is to streamline the corporate income tax to achieve a closer parity between the income tax levied on corporations and individuals.
To that end, the Special Council focuses on dramatically reforming Georgia’s current hodgepodge of credits against the corporate income tax, while also recommending that Georgia continue to maintain a parity of tax rates between the taxes on corporate income and personal income.
1. Sunset (or immediately eliminate) nearly all existing corporate income tax credits.
According to the Special Council, “only a small percentage of the jobs that receive a tax credit [in Georgia] were created because of the credit.” This is one of the Special Council’s most important findings, for it indicates that Georgia’s current system of credits is not actually inducing many businesses to locate or expand here. Therefore, the Special Council recommends that all existing credits be eliminated or set to sunset in 2014. Rather than a system of selective credits with specific requirements and arduous application processes, the state should permit only two credits (as described below in item 2), and the tax rate should be lowered for all businesses.
The Special Council explicitly includes the low-income housing credit and the film tax credit in its recommendation sunsetting all existing credits. It noted that both of those credits “have many advocates” but that there is no basis to make an exception for those credits until there is evidence that the credits actually generate net positive revenues for the state. With respect to the film tax credit, an ongoing study by the Department of Economic Development (set to be concluded during 2011) may provide the economic justification.
While the Special Council recommends these changes to create a more efficient and equitable tax system, it also recognizes that credits earned prior to the sunset date should be grandfathered.
2. Replace the former system of credits with job credits and capital investment credits that can be distributed by the Department of Economic Development to attract specific new businesses and investments.
In place of the complex former system of various credits with various requirements, the Special Council recommends that Georgia allow transferable and/or refundable credits to be distributed by the Department of Economic Development—with the approval of the governor—to attract specific new businesses or specific new investments by businesses already located in Georgia.
3. Maintain parity of rates with the personal income tax.
The Special Council recommends a rate of “no greater than 5% in January 2012,” with further reductions over time to match reductions in the personal income tax rate.
Sales and Use Taxes
The Special Council’s view of how to reform sales and use taxes can be summarized easily: the tax base should be expanded, and the legislature should sunset and/or immediately eliminate many of the 110 existing exemptions. However, the Special Council does not necessarily believe all of those exemptions should be permanently removed from the tax code; rather, it simply recommends that those exemptions be set to sunset so that the legislature will be required to review the original justification for the exemption.
1. The exemptions for business and agricultural inputs should remain in the tax code.
While the Special Council’s emphasis is on expanding the tax base and eliminating exemptions, the Special Council also makes clear that the existing exemptions for business and agriculture inputs should be retained and streamlined, so as to avoid inefficient “tax pyramiding” that results when tax is imposed before the final sale of an item and then included in the item’s final cost. Accordingly, the Special Council recommends that Georgia should retain its existing exemptions for business and agricultural inputs.
The report also states that Georgia should add to its list of business input exemptions an exemption for “energy used in manufacturing,” as the significant energy costs involved in manufacturing operations can be an important factor for a business deciding where to locate its operations.
2. Eliminate the exemption for food purchased for home consumption and replace it with a refundable credit for low-income individuals.
3. Do not pass additional sales tax holidays.
4. Remove the casual sale exemption for titled motor vehicles, boats and planes.
Unlike many states, Georgia exempts “casual sales” of motor vehicles and other titled tangible personal property (i.e., boats and planes) from sales tax. This exemption distorts the marketplace and discourages purchases from dealers in used items. The Special Council recommends that the purchase of automobiles, boats and planes be removed from the exemption’s coverage.
5. Expand the sales tax base to impose tax on enumerated personal services.
Georgia, like many states, currently imposes its sales tax primarily on tangible personal property and largely excludes most services from the tax. However, as services have risen as a share of the economy, Georgia’s sales tax base has seen a corresponding erosion.
Accordingly, the Special Council has identified services that are “primarily” purchased by businesses and determined that those should not be added to the tax base. On the other hand, for services that are primarily purchased by individuals, and for which the collection and remittance of tax would be easy to administer (e.g., haircuts, dry cleaning and alterations, pet services and various membership fees, as well as repairs and maintenance on homes, yards and automobiles), the Special Council recommends that the legislature begin imposing tax on those transactions.
6. Georgia should continue to pursue avenues to impose and collect tax from remote sellers.
In the last sales/use tax issue discussed in the report, the Special Council recommends that Georgia continue to make the necessary changes for the state to become a full member of the Streamlined Sales and Use Tax Project. The Report also includes a recommendation that the state continue to use resources to “entice” remote vendors to collect Georgia sales and use taxes. However, the Special Council does not recommend that Georgia follow the lead of other states, including New York, in passing an “Amazon law” that would require any remote vendor with “affiliate” sites in the state to collect and remit Georgia sales tax.
In the final pages of its report, the Special Council discusses a few specific recommendations with respect to some of the state’s other tax types, including raising the taxes on cigarettes and motor fuel and replacing the current taxes on enumerated telecommunications transactions with a broader tax on “communications services.”
Finally, the Special Council offers a number of other recommendations for improving Georgia’s tax climate:
- Georgia Tax Court – The Special Council recommends that the legislature establish a “tax court” to provide a specialized and independent forum for the resolution of tax disputes.
- New rules for passage of tax legislation – Under Georgia law, all legislation with a “significant revenue impact” must have a fiscal note prepared within five days. With respect to tax legislation, the Special Council recommends that the legislature should revise that requirement to permit an appropriate amount of time to review the anticipated fiscal impact.
- Improved public guidance from the Department of Revenue – The Special Council recommends that the Georgia Department of Revenue improve its public communications (e.g., by publishing all administrative rulings and advice memoranda).