Current Proposal

As first previewed in this blog on December 30 of last year, the Georgia legislature has been hard at work on a bill to enact the recommendations of the Special Council on Tax Reform and Fairness for Georgians. The Special Council’s recommendations were dropped into a number of bills by the legislature, but the bill numbered HB 387 has become the vehicle for any tax reform that will be passed this session.

While the Special Council issued a report citing recommendations to simplify and overhaul Georgia’s entire system of taxation – including specific proposals regarding the reduction of personal and corporate income tax rates, a streamlining of the corporate tax credit scheme, the elimination of numerous sales tax exemptions, and a broadening of the sales tax base to include groceries and numerous enumerated services – the current bill includes, unsurprisingly, a much less ambitious set of proposals. As it stands, HB 387 would:

  • Reduce the personal income tax rate from 6% to 4.5% for taxable years beginning on or after Jan. 1, 2012;
  • Cap the amount of itemized deductions that individual taxpayers may take at $17,000 per year, and begin phasing out the ability to take itemized deductions at $37,500 in federal adjusted gross income (or $75,000 for married couples);
  • Create an exemption from sales tax for the energy used by manufacturers;
  • Impose a 7% sales tax on a broadly-defined class of “communications services,” including cable, satellite, and phone services, while exempting at least a portion of the business inputs of communications providers;
  • Eliminate the exemption from sales tax on casual sales of automobiles, boats, and planes; and
  • Begin to impose sales taxes on automobile repair services.

Notably, HB 387 does not (and any tax reform bill passed this year almost certainly will not):

  • Eliminate the exclusion for the first $35,000 of retirement income ($70,000 for a married couple);
  • Eliminate the sales tax exemption on groceries (an issue that became a significant sticking point when the bill was first introduced and threatened to topple the tax reform effort completely); or
  • Begin to impose sales taxes on a number of other items that became hot-button issues, including Girl Scout cookies, haircuts, veterinary services, dry cleaning, or AAA memberships.

Status Report and Prognosis for Passage

Our contacts in the legislature tell us that HB 387 is being revised to incorporate the proposals discussed above and will be given an up-or-down vote on the entire package of proposals this week, possibly as early as today. The general consensus is that the bill has a very good chance of receiving a majority of votes and crossing over to the Senate for a similar vote that could happen as early as Friday of this week.

However, the bill’s passage is not guaranteed. First, the House Democrats have significant reservations with the bill’s proposals to cap (and phase out) the itemized deductions for individual taxpayers, and some – including Stacey Abrams, the House Minority Leader – have argued that the bill actually creates a tax increase for Georgia’s middle class (see the Democrats’ computation here):

https://spreadsheets.google.com/ccc?key=0AvKEK8-LWmzhdHozS1AzdlJMeTcyRklCN3YtZXp0LVE&hl=en#gid=0) .

If the Democrats can make a convincing case that the bill – which is being pushed as “revenue neutral” – nevertheless yields a tax increase on Georgia’s middle class, the bill could lose steam in the coming days. On the other hand, if the Republicans can successfully press their case that the reduction in income tax rates will create jobs, then this author handicaps the bill’s chance of eventual passage as strong (following the necessary trade-offs to make sure that the bill is revenue-neutral).