Here are a few factoids on state and national taxes. The late Sen. Paul Coverdell calculated that our parents seemed to live better than we do today because they paid only 20 percent of their income to taxes, while today we pay around 62 percent in federal, state, property and local option sales taxes.
Dr. Albert W. Niemi, Jr., dean of the business school at SMU, says the only country whose residents pay more taxes than those of the United States is Sweden. Essentially, we are a Socialist country. If you live in the state of Georgia you can pay more than 700 kinds of taxes from federal and state income and sales taxes to small taxes on items such as legal land transactions. A large percentage of Americans pay no taxes.
Sen. Saxby Chambliss and Rep. John Linder have sponsored a bill in Congress to do away with income tax and change our system to a 23 percent national sales tax. Income taxes would go away, as would the Internal Revenue Service. The poor would be protected and prices would drop, because corporations would not have to pay corporate income tax.
Does this sound too good to be true? It could be a dream come true.
President Bush is lukewarm to their plan. According to a spokesman in Sen. Chambliss’ office, the bill will probably be changed or modified a great deal. He said the senator and Rep. Linder introduced their bill to promote discussion of the issue, and they both will support whatever the president comes out with later this year. One proposal already in the Georgia state legislature this session is to replace school property taxes with a four or five percent state sales tax. State taxes generally follow the federal tax system.
How would Georgia’s tax system change under this new proposed system of a national sales tax? I put this question to former Gov. Roy Barnes. His insight was fascinating. First of all, Barnes said that there is an unwritten rule that past governors do not criticize present governors. His comments are strictly about taxes and how they work.
Young: What do you think about transferring income taxes to a national sales tax?
Barnes: In the first place, anytime a politician tells you that they’re going to raise your taxes so that they can cut your taxes, beware, because they’ll never do it. This recent proposal to raise sales taxes is a good example. In recent years counties have promised to have a local option sales tax so they can lower or roll back property taxes. I query, “Are your property taxes lower today than they have been in the past?” No, they are higher. Second, it’d be disastrous for merchants. Which brings the third point: The only thing that’s kept the economy strong during the past few years is consumer spending. This proposal would hurt the retail consumer and retail merchants.
Young: Do you have an example?
Barnes: For a new car that sells for $25,000, besides the 23 percent — and you assume you [still] have the normal 6 to 7 percent local sales tax — it’d be about 30 percent. So, on a $25,000 car, you would pay $7,500 in sales tax. If you add another 5 percent sales tax to replace school property taxes the price of the car jumps to $33,700. If that won’t decrease automobile sales, I don’t know what will. Now, the argument on the other side is that it’s going to free up all this money. Well, we know that sales taxes hurt average citizens, particularly lower- and middle-income. So it doesn’t free up enough money to offset the retardation of consumer sales. I think it’s disastrous.
Young: What is your solution?
Barnes: The first thing you have to do is quit creating special deals in every tax bill. When I was a young boy, we operated under the tax code of 1954. It was about two inches thick, and it had one volume abridged. Our current tax code has six volumes abridged….In every session of Congress, somebody has gotten a tax break. They get a tax deal, and we pick up the tab. Don’t get into the issue about rates, just cut out the special deals. It’s much more effective and fair, rather than creating for a middle-income person an $8,750 tax bill to buy a $25,000 car.
Young: Why don’t we adopt the value-added tax that is in place in Europe?
Barnes: Have prices gone down in Europe? They have not. They say it’s because they didn’t do away with their income tax, but the truth of the matter is that it’s not common sense to impair retail sales with such an add-on, thinking that people are going to spend more. It’d be such a shock to the economic system that it has the potential to have disastrous results. I think that is why President Bush is backing off the national sales tax idea.
The Georgia tax code is much simpler, but it’s still riddled with some exceptions. When I first went to the Georgia Assembly in the early 1970s, there were three or four exemptions for sales tax. One of them was the Holy Bible. Now there are over 90 exceptions to Georgia’s sales tax. What we don’t realize is that somebody’s exemption becomes another person’s tax burden. We need a basic minimum standard of supporting schools, paving roads and locking up prisoners. It’s too riddled with exceptions. Georgia’s income tax is better, and we have a 6 percent cap on income tax. Historically, corporate income taxes brought in about 10 to 13 percent of the state revenue sales. Now it’s down to less than 5 percent. What’s happened is that companies have moved the accounting offshore so they don’t have to pay the tax. Second, they’ve picked up all these exemptions.
Young: What is the answer?
Barnes: I think we should re-examine those exemptions. I give you this with the caveat that my philosophy of government is that in the retail business, you manage from the expense side, and not from the revenue side. I have never once voted for a tax increase. I voted against every one of them, even as a governor. While I was governor, I never proposed a tax increase. In fact, we had several cuts during that time, over $1 billion in cuts. I think government has to manage expenses toward the goal of increased revenues or with the growth of revenues. But things like this, such as setting a 30 percent sales tax, would cause such a shock to the economy, and be so harmful to retail merchants, that I don’t think they could recover.
Young: The Internet is impacting retail sales and depriving the state of sales tax revenue. How should we address this issue?
Barnes: As for sales that are done on the Internet, I think they should be taxed. After discount stores, Internet sales and department store sales are the number two and three rankings of sales for this year. Congress is prohibited from taxing it for another three years…but the state is losing the $350 to $500 million in sales tax dollars.
Young: What if we replaced Georgia’s sales and income tax with a state sales tax similar to the Linder national sales tax plan?
Barnes: If spending by the consumer and retail sales fall, this economy would take a nosedive. The state takes in about $16 billion in tax revenue. To do away with about half of that, 53 percent of which is derived from the income tax, would be $8 billion you would have to create by sales tax. If you kept the current exceptions on sales tax, every penny raises about $750 to $800 million. You would have to raise sales taxes an additional 10 percent just to replace the existing loss of Georgia income tax revenue. On top of that we have sales tax of 4 percent, so it would be a total of 14 percent Georgia sales tax. You would have the 23 percent national sales tax, plus the 14 percent, which is 37 percent, plus county and city local option add-on taxes, local option sales tax and local option education sales taxes capital. So to replace income taxes the new sales tax would be roughly 40 percent. I can’t believe intelligent people are walking around talking about it.
Sales taxes are episodic; during recession, they plunge because people quit spending, so they’re not a steady source of income. Income taxes fall, but not like sales taxes. If we go into a recession on the government plan of 23 percent sales tax, and sales tax falls, it creates a huge deficit.
It also goes back to the simplicity. Look at the return your father had to fill out, and look at your tax return from last year. No human can fill out a tax return, not even an accountant. You go to an accountant and they say they’ll put it in a computer program. The current code is 4,984 pages long. And then when you reform the income tax, you give me a current 100 page income tax code that’s fair and not riddled with special favors, then I’ll listen to you on whether I can trust you to raise my sales tax to 23 percent.
In the last four years, if it hadn’t been for the consumer, we would have had one of the worst depressions ever. Low interest rates and consumer spending kept us from having a deep, deep recession. Somebody went to the president and said, “I think you’re about to retard and impede consumer sales that kept us out of the last recession.”
Neely Young is the editor and publisher of Georgia Trend.