Georgia Income Tax Cut and Reform: Details and Analysis

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After several rounds of negotiations, Georgian lawmakers signed into law HB 1437 on April 4and. If certain financial conditions are met, this tax reform bill will consolidate the state’s six personal income tax brackets into one flat rate, eventually reaching 4.99% over several years. The bill awaits action by the governor.

During its journey through the legislative process, HB 1437 saw significant changes that altered its timing and potential effectiveness. Lawmakers can be proud of the steps they’ve taken to improve the tax code, but should consider redesigning the bill’s tax triggers to better achieve their goal of responsible improvement.

Round 1

Legislation introduced would have consolidated the state’s six personal income tax brackets into one, simultaneously raising the top rate from 5.75% to 5.25% in tax year 2024 The bill would also have eliminated the standard deduction for all taxpayers, instead increasing the personal exemption from $2,700 to $12,000 for single filers and from $3,700 to $24,000 for married filers. jointly, successfully eliminating the state marriage penalty.

Such legislation would have gone a long way in improving Georgia’s attractiveness among states, boosting the state’s overall ranking from 32n/a at 16and on our State Enterprise Tax Climate Indexan annual comparison of the competitiveness of state tax structures.

2nd round

The bill underwent significant amendments in the Senate. First, the changes would be phased over many years, beginning in 2024 and ending in 2032. Instead of immediately creating a flat tax, the planned changes would consolidate the six income tax brackets into two in 2024 and the would remain until 2032, when a flat tax would be introduced. The top rate would remain at 5.7% and the bottom rate at 4.99% until a flat tax is implemented in 2032, but the income threshold for the top rate would increase each year, reaching a threshold of $500,000 in the 2031 tax year. These increasing bracket thresholds would not be doubled for married taxpayers filing jointly, thus preserving the state marriage penalty.

Although there were specific years assigned to these tax changes, there was no guarantee that the changes would occur when expected, as the amended wording included certain financial conditions that had to be met before a tax reduction could be triggered. Each planned modification would be delayed for one year if these conditions were not met.

Round 3

Once HB 1437 hit the conference committee, it transformed again. Instead of creating a two-tier system with an ever-increasing top rate threshold, the first change triggered would now create a flat income tax of 5.49%, with six additional rate cuts of 0.1 percentage points each, for a target rate of 4.99%. . If the financial conditions are still met, these reductions would take place every year beginning in 2024 and ending in 2030. Notably, this final version slowly increases the standard deduction for alternately married filers until it reaches the value double the deduction for filing single, thus eliminating the marriage penalty with the completion of the reduction schedule. The standard deduction for single filers would increase to $12,000 with the first scheduled change, and the personal exemption would be removed.

Giving priority to a flat income tax rather than an increasing threshold is a wise choice for the State. A single rate structure improves the economic competitiveness of the tax and, based on the experience of other states, serves as a buffer against future rate increases. In times of high inflation, this also solves a problem with the current system. Currently, Georgia’s range thresholds are fixed dollar amounts that are not linked to inflation. This means that as the actual dollar amount of income increases, more of that income falls into higher tax brackets, even though the taxpayer’s purchasing power remains the same. By eliminating bracket thresholds altogether in favor of lower rates, lawmakers would avoid a path of future non-legislated tax increases.

Notably, the final version of the bill also requires the House Ways and Means Committee and the Senate Finance Committee to review all state tax credits, deductions, and exemptions by December 1, 2023.

The bill retains the tax triggers added by the Senate. For a planned reduction to occur, the following three conditions must be met:

  • The Governor’s revenue estimate for the following year is at least 3% higher than the previous year’s estimate.
  • Revenue collections for the most recent fiscal year are greater than each of the collections for the previous five years.
  • The revenue shortfall reserve contains an amount at least equal to the expected decline in revenue that would result from the tax reduction.

As in the Senate version, the planned tax cuts would be delayed for a year each time the state fails to meet these three criteria.

Tax triggers can be a smart way to induce rate reform in a state, especially if there are concerns about future earnings. However, these particular triggers do not correspond to an ideal system, in particular based on the variance between the estimates. Even if the state wishes to use a revenue projection to trigger a rate reduction, it must measure the difference between these projections and the actual number of collections from the previous year.

The second stipulation – overrunning the collections of the previous five fiscal years – is better in that it examines the actual collections but remains imperfect. Revenues in fiscal year 2021 were abnormally high for most states, so it will likely be some time before Georgia meets both the first and second rate cut requirements. However, since there is no need to adjust previous years’ figures for inflation, it is possible that the state may end up exceeding this threshold when collections have only increased in nominal terms, rather only when the State has observed a real increase in purchases. Power.

Although the combination of the two measures creates a link between a triggered tax cut and real income growth, the technique is far from simple. A more effective tax trigger would be to compare the previous year’s net income to a predetermined benchmark, adjusted for inflation each year. Each time the baseline is breached by a set percentage, the rate reduction is triggered and that base revenue level is updated to match the new revenue level, which also needs to be adjusted based on the inflation for future comparisons.

In this way, Georgia would avoid cutting rates when it cannot afford a cut, but would also provide rate cuts when it could afford to.

Conclusion

The enshrined bill presents a different timeline for change than the House’s original intent, but HB 1437 still represents an important opportunity for Georgia. If even one of the scheduled rate changes is triggered, the state will be well on its way to a simpler, more efficient tax code.

The first planned reduction would improve the state’s situation Hint score spectacularly, boosting his overall standings from 32n/a at 19and. If all six rate cuts are triggered, Georgia will actually see a lower final rate than stated in the original version of the House bill. Completing the six rate cuts would improve the state’s situation Hint score at 16and globally.

Lawmakers should be proud of the progress they’ve made this legislative session, but should consider revisiting the bill’s tax trigger mechanism to ensure the design works as intended.

State legislatures pass tax reform and relief in 2022


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