From the Publisher: Taxing Thoughts

The state is in great financial shape. Now what?

Georgia, in addition to being the best state in which to do business for nearly a decade, is run in many ways like a business itself. In September, state government reported a $2.2 billion surplus, even above its “rainy day” fund legal cap of $4.3 billion.

Part of this is due to overestimating the COVID-19 impact and receiving federal funding via the Coronavirus Aid, Relief and Economic Security (CARES) Act and the American Rescue Plan. Another factor is the $400 million in state budget cuts in 2019 in response to revenue shortfalls after the state reduced its top income tax rate. There’s no doubt that Georgia has been in good fiscal health for decades and builds upon a strong credit rating to fund capital projects and pay down debt.

But this sound fiscal health does not mean that the state should cut taxes again, which some say will lead to greater prosperity. Tax-cut supporters say restored funding for education and public health – which have suffered cuts over the past few years – should come from the surplus. With a top income tax rate of just 5.75% following the 2019 tax cut, others say Georgia is a little too lean and mean to handle rising public health and education costs and is cheating future generations out of prosperity by refusing to address long-term issues.

What’s a state to do?

For years many economists espoused supply-side economics, which says tax decreases pay for themselves in increased productivity, wages and consumer activity. “Reaganomics,” however, has been debunked by study after study. One such study, from the London School of Economics in 2020, argues that tax cuts on the rich in advanced economies over the last 50 years generated an effect “statistically indistinguishable from zero.”

Basically, the growth in revenue expected to offset the tax decrease hasn’t happened, echoing the results of the 2017 national tax cut (which, along with $3 trillion for COVID-19, has been blamed for increasing the national debt by $7.8 trillion during former President Donald Trump’s administration, according to ProPublica). But that hasn’t prevented state leaders from seeking more cuts to the state income tax rate.

These leaders point to states including Texas, Florida and Tennessee that have no state income tax. They note that the Texas-sized government not only worked without income tax but that it also offered Chapter 313 tax incentives that allow large companies to avoid some property taxes levied by school districts. Chapter 313 was a huge economic incentives package that cost the state some $10 billion in tax deferments before it was dissolved earlier this year.

Others say the reliance on sales and property taxes in lieu of a state income tax perpetuates inequality. They argue that the concept of equity – that everyone paying an equal amount for services – means the poor (denied the additional resources of the wealthy) pay more than their fair share. Equity has come to the fore since a structural change in standardized deductions in 2017 made it even easier for top earners to pay less in income tax than others down the pay scale.

We may think that income taxes have gone up over the years, but the fact is income taxes are lower than they’ve been in decades. According to the Economic Policy Institute, the federal top marginal tax rate (the rate applied to higher income levels) has fallen over the decades from just over 90% in the 1950s to 37% in 2020, which has impacted funding for public programs.

Georgia, based on the current reserve and surplus, could simply replace the services it reduced in the throes of the pandemic without skipping a beat. The state could go bigger by boosting spending on public health and education – it could even be argued such investments bring a greater return on investment than tax cuts.

By decreasing taxes, the state might see an exodus of high rollers from states with higher income taxes, but the burden would fall on local governments around Georgia to make up the cost for services that people and their businesses require. Smaller Georgia communities, unable to afford competitive services, could be left behind.

Of course, no one wants to pay income tax, but we all use things – public health, education and public safety, among them – that are paid for by taxes every day. Food for thought in 2022.