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Tax Council Proposes Lower Income Tax Rates And New Groceries Tax

The Georgia Special Council on Tax Reform and Fairness final report released today proposed dramatic taxation policy changes that include proposals to reduce personal and corporate income taxes and change the way groceries, cigarettes and motor fuel taxes are imposed. The definite direction is toward what are known as consumption taxes and away from state taxation on income.

New sales taxes could be imposed on some professional services and energy taxes that affect industries could receive new exemptions. Taxation changes are possible for the communications services and insurance industries.  The Council also recommended that the General Assembly should abandon back-to-school sales tax holidays that cost the state $36-to-$47 million annually.

The twelve-member Special Council of economists and private industry executives has worked on these recommendations since last summer.  Proposals are intended to reinvigorate and stimulate the Georgia business environment. They also could stabilize state government revenue that was battered during the recent recession because state income is highly dependent on income taxes.

The Tax Reform Council’s major recommendations include:

Personal Income Tax: Maintain the 6% current rate during 2011. Reduce the rate to 5% in January 2012, 4.5% in January 2013 and 4% in January 2014.  Georgia itemized deductions, standard deductions and limited exemptions would be eliminated.  The personal exemption for dependents would be retained at $2,000.  The Council would eliminate adjustments to federal adjusted gross income so that Georgia AGI conforms with federal AGI with limited exemptions.

The Council proposed repeal of retirement income exclusions that are set to begin in 2012, and it proposed phase-out of the current exclusion limit of $35,000 over a period of time.  Current personal income tax credits would sunset in 2014 including the current low income credit.  Credits would remain in place for income taxes paid to other states, federally funded credits for energy and water-efficient products and some angel investor credits.

Corporate Income Tax: Simplify credits and maintain parity with the personal income tax rate: This means corporate income tax rates would decline on the same schedule as personal rates, staying at 6% this calendar year and then reducing to 4% by January 2014.  All current economic development tax credits would be eliminated in 2012.  All other existing corporate tax credits would sunset in 2014 except those that were granted prior to the sunset date.

The Council also proposed to create a new economic development recruitment fund adminstered by the Department of Economic Development which would have wide latitude to craft rules and regulations.  The Department could choose to grant economic development tax credits based on jobs created and the total value of capital investment.

Groceries Sales Tax: Eliminate the current food for home consumption state sales tax exemption effective June 30, 2011 with an exception for food purchased with food stamps and food purchased as part of the WIC program (Women, Infants and Children).   This means the state would begin to impose sales taxes on grocery purchases at the same rate it taxes other purchases.

Government Exemptions and Business Inputs: The Council proposed that sales and use tax exemptions that constitute government exemptions and business inputs should remain in law and should not sunset.  Many of these impact the agriculture, mining and manufacturing industries.  The Council also recommended that a new business input exemption should be created for energy used in those same three industries. Taxes on energy are considered to negatively affect the competitiveness of businesses and entire industries when Georgia imposes them and other states do not.

The Council recommended all other non-government and non-business input tax exemptions should sunset pending review by the General Assembly to determine whether economic conditions or other reasons justify continuing them.  Georgia Tax Code has more than 100 special exemptions including some that affect the health care and education industries.

Casual Sales Tax: Impose state sales tax on motor vehicles, watercraft and aircraft.  Casual sales is defined as one party to another party outside of business relationships entered into by persons who  purchase vehicles, watercraft and aircraft from dealers.  Forty-four states already impose this tax.

Personal and Household Services: The recommendation is to impose state sales tax.  Georgia would not tax babysitting but examples in the Council report include downloading books and music from the Internet.  Also, services tied to tangible personal property such as repair services including home repair, personal services such as haircuts and other services provided by vendors who already have a state sales tax certificate.

Cigarette Tax: Increase from 37 cents to 68 cents per package.   The higher rate would be on par with the average in other southeastern states.  Georgia’s cigarette sales tax is the lowest in the Southeast. The highest per package tax is $1.34 in Florida.  Tennessee charges 62 cents, South Carolina 57 cents, North Carolina 45 cents and Alabama 43 cents per package.

Communications Services: The Council recommends replacement of current sales and use taxes and franchise fees  with a 7% excise tax on “communications services.”  The tax would not apply to Internet access because federal law prohibits states from imposing tax on internet access services.

Motor Fuel Tax: Georgia highway and bridge construction and maintenance is financed by motor fuel taxes.  There are two taxes: a 7.5 cents per gallon tax that has been in place since 1971 and a 3% variable tax that changes every six months based on current retail pricing.  The Council recommended converting the variable tax rate that changes twice per year to a per gallon rate reviewed annually.  There is no proposal to increase the actual tax.

Insurance Premium Taxes: This tax is received on policies written in Georgia.  It actually is two taxes with revenue paid to the state and also to local governments.  The Council said the current cost to insurers in Georgia is more than double the U.S. insurance premium rate average tax cost.  The Council is recommending that the tax rate should be 1.75% and that the General Assembly should determine how that should be divided between state and local governments.  The state revenue structure should be reviewed on four-to-eight year cycles in line with the gubernatorial calendar.

E-Commerce Taxation: The Council reported Georgia will lose up to $410 million in 2012  because a U.S. Supreme Court ruling does not allow states to require that vendors must collect sales taxes on purchases made in those states.  Several states including Georgia have joined an effort to resolve this question.  The Council recommended that Georgia enact measures to encourage vendors to collect sales and use taxes on a voluntary basis. Several states have attempted to resolve this question with legislation that often ends up in litigation.

Other Recommendations:
There are many. The state should establish a Tax Court independent of the state Department of Revenue to hear tax appeals.  A commission should be established to study local property taxation policy.  Local governments and school boards should have the option to use SPLOST revenue that is not required for capital projects to meet operating expense needs, if approved by voters.

There should be a review of the state Department of Revenue organization, practices and processes. This should include better alignment between local governments and the Department of Revenue along with identification of uncollected sales tax revenues.

The state revenue structure should be reviewed on four-to-eight year cycles in line with the gubernatorial calendar.  (The current review is the first in 80 years!).  The state should rebuild its reserves — known as The Rainy Day Fund — in order to ensure that it can retain a triple A bond rating. Reserves that once exceeded $1.5 billion slipped below $100 million as the state used those funds to pay its bills during the recession.

Next:  The Special Council on Tax Reform report will be reviewed by a Special Joint Committee on Revenue Structure whose members will include the Senate President and House Speaker, Senate and House majority and minority leaders, and the Senate Finance and House Ways and Means chairpersons. Two additional senators and two representatives will also serve on the committee.

The Special Joint Committee review could take two or three months. Final House and Senate votes, if they occur this year, would not be expected until near the end of the General Assembly session that begins Monday. The bill that advances from the Special Joint Committee would be voted up-or-down by House and Senate members and it could not be amended on the floor.

The Council’s complete report and background materials are available on its website:

http://fiscalresearch.gsu.edu/taxcouncil/downloads/FINAL_REPORT_Jan_7_2011.pdf

Mike Klein is Editor at the Georgia Public Policy Foundation.

January 7, 2011 Posted by mikekleinonline | Uncategorized | Georgia Public Policy Foundation, Georgia Special Council on Tax Reform, Mike Klein | Leave a comment