Mike Klein Online

Tax Reform Matters: “Very Little Has Been Done For Decades”

There is nothing flashy about a couple hundred people crowded into a room where the discussion is about state government revenue strategy.  As a photo opportunity, it’s not a great one.  But in Georgia, there might be nothing more important going on during these hot summer days.

The Special Council on Tax Reform and Fairness gaveled itself into action this week in Atlanta.  Media, lobbyists and others with skin in the game filled a huge conference room.  This fall the Council will propose ideas to stabilize state government’s wobbly income stream and make it less vulnerable to economic downturns.  The impact on Georgians could be profound.

“The easy (choices) seem to have already been made and we’re in the sewer,” said new Council chairman A.D. Frazier who was Chief Operating Officer for the 1996 Olympic Games.

Georgia relies on personal income taxes and sales taxes for three-fourths of its state revenue.   Income tax receipts have declined 21% and sales tax receipts are down 17% since 2008.

Frazier challenged six high profile private industry executives and four public sector economists to understand Georgia’s revenue reinvention challenge is large and they should “divide it into bite sized chunks.”  Outgoing Governor Sonny Perdue is the eleventh member.

The process to create a new Georgia state revenue structure is unlike anything ever tried here.  It closely resembles BRAC – the federal government’s model to open, close or realign military bases.  Congress is presented with military base options, it must vote up or down and it cannot offer amendments.  The same idea is being tried to reinvent Georgia’s tax revenue.

Council recommendations will be turned over to a 12-member House / Senate committee when Georgia legislators return in January.  The committee will turn the options that it selects into a bill and the General Assembly will vote up or down without amendments.  Other ideas beyond what the Council proposes could be introduced as separate legislation.

Georgia’s economy is heavily dependent on real estate and banking, two industries that tanked during the current recession.  The state budget also tanked, down from $21 billion in 2008 to $17.9 billion for the new fiscal year that began this past July 1.

And it gets worse.  Three weeks into the new budget the Governor’s Office ordered agencies to cut 4% and prepare for cuts up to 8%.  The state counted on hundreds of millions in Medicaid reimbursement dollars that may not materialize.

Special Council member Jeff Humphreys is Director at the University of Georgia’s Selig Center for Economic Growth.  Humphreys discussed the complexity of tax reform during an interview with the Georgia Public Policy Foundation one day before the Council’s first meeting.

“It’s impossible to shield revenue from ups and downs of the business cycle but I would like to see tax structure at least not accentuate the ups and downs,” Humphreys said.

“During good years revenue zooms upward which tends to produce decision making based on unrealistic expectations.  During bad times, it’s plunging even more than state GDP which means you have to do a lot of budget cutting over a very short period of time.”

Humphreys concluded, “Very little has been done for decades.”

Georgia has not attempted systemic tax reform in 30 years.  The Council will focus on how to increase state sales tax revenue, potentially expand sales tax to services and it will reconsider some 119 special exemptions.  Reductions in personal and corporate income tax rates will be on the table.

There will be a special focus on groceries that currently enjoy a state sales tax exemption.  Analysts estimate reinstating the groceries state sales tax could raise several hundred million dollars annually.  Georgia counties already impose a local groceries sales tax.

Fifteen states that include five southern states impose a groceries sales tax, according to The Federation of Tax Administrators.  Mississippi is the highest in the nation at 7%.  Alabama, Arkansas, North Carolina and Tennessee are the other southern states.

Revenue reinvention is by no means a sure thing.  Maine legislators thought they had the right idea this year with a bill that would expand the state sales tax to services and decrease the state personal income tax rate.  That legislation required ballot box approval and Maine voters rejected it this summer.  Georgia tax reform legislation will not go before the voters.

Georgians can follow the Council’s work at its new website and the Council announced that it will hold statewide meetings to get input from folks beyond Atlanta.

Frazier concluded the Georgia’s Council first meeting with a direct, easy to understand missive to his fellow committee members.  “Model yourself after winners and avoid being a loser.”

Mike Klein writes about tax reform and other issues as Editor at the Georgia Public Policy Foundation.

July 29, 2010 - Posted by mikekleinonline | Uncategorized | A. D. Frazier, Georgia Public Policy Foundation, Governor Sonny Perdue, Jeff Humphreys, Mike Klein Online, Sales Tax on Groceries, Selig Center for Economic Growth, Special Council on Tax Reform and Fairness, University of Georgia, Watchdog.Org