If it’s novel to see any level of government cut spending during good times — the subject of my column last week — this week we return to a more familiar tune:
If government anywhere is cutting taxes, it must be to benefit “the rich.”
That’s an old standard for those who think more spending is always the answer, but this particular occasion concerns the tax cuts state legislators set in motion in 2018. Those cuts were the right answer to a unique circumstance. It’s worth remembering just what happened then, and why.
Recall that in the final days of 2017, Congress passed and President Donald Trump signed the Tax Cuts and Jobs Act. Along with lowering the industrialized world’s highest corporate income tax rate, the law also eliminated or capped a number of deductions and lowered rates for the individual income tax.
The law stood to have a ripple effect on Georgia, and not a good one. Because our state adopts most federal deductions, a number of Georgia taxpayers stood to see their taxable income increase substantially. But because our state sets its own income tax rates, there would be no corresponding rate cut unless the General Assembly acted.
According to a February 2018 analysis by economists at Georgia State University, the upshot was a $5.2 billion surge in state tax revenues between 2018 and 2023.
Now, higher-income earners are more likely than lower-income earners to itemize their deductions – not to mention that they pay the largest tax bills. So, naturally, they stood to bear a larger share of this surge. While about three-quarters of Georgia taxpayers would have seen a tax hike of $200 or less, those at the very top of income scale were projected to pay over $3,800 more.
The Legislature’s remedy was House Bill 918, which had three steps. Step one, which took effect for 2018, was to double the standard deduction for all filers who don’t itemize. Step two, which took effect this year, was to lower the state’s top income-tax rate for the very first time — from 6 percent to 5.75 percent.
The third step, slated for next year, is what’s causing the commotion now.
HB 918 called for the top income-tax rate to fall to 5.5 percent in 2020. Now, some observers are decrying the move because most of its benefits would go to “the rich.”
But remember what I said about the highest earners paying the largest tax increases if state lawmakers hadn’t done anything? It is also true that taking steps one and two alone would leave the highest earners — and only the highest earners — still paying more than before.
Step three ensures all Georgia taxpayers get a cut, not a tax increase.
The tax cut will be larger for some than others for the same reason their tax increase would have been larger: They make more money, so any change in rates will have a larger effect for them.
That is not, however, the reason to ensure the rate falls to 5.5 percent. The better reason is that our neighbors have been out-maneuvering us on this front, and we need to adapt to remain competitive.
Florida has long had zero income tax. Tennessee is phasing out its tax on income from interest and dividends and in 2021 will have no individual income tax. North Carolina has been lowering its rate in recent years, from a high of 7.75% to this year’s 5.25%.
Yes, each of these states has other taxes. But income tax is arguably the most important one when businesses look at where they want to expand or relocate.
With even some modest spending restraint, and especially if paired with some further closing of tax exemptions and deductions, Georgia can afford to take this next step and lower its top tax rate. In fact, it can’t afford not to do that.
Kyle Wingfield is president and CEO of the Georgia Public Policy Foundation: www.georgiapolicy.org.