Georgia ought to bolster its plans for tax reform

In 2022, Georgia lawmakers passed a tax reform package that will change the state's progressive income tax to a flat tax of 5.49 percent starting in 2024, with triggers to provide additional rate reductions. Although this is a significant step forward, lawmakers should consider strengthening their reforms if the state truly wishes to establish itself as a rival in an economy that is becoming increasingly mobile following the pandemic.

State tax reform and competitiveness have dominated the past two years, with many states lowering their individual and corporate income tax rates. And for a valid reason: Businesses and employees alike now have more freedom to move around than ever before thanks to the growing trend toward remote and flexible work arrangements. According to the data, the majority of people are shifting their residences from states with high taxes to those with lower taxes and thriving economies.

The purpose of Georgia's revenue trigger mechanism in the 2022 bill is to give the state a competitive advantage by gradually lowering the income tax rate to 4.99%. The state's targeted rate would place it further apart from South Carolina (6.5 percent) and just below its neighboring state of Alabama (5%). The individual income tax rate in North Carolina is currently 4.75 percent, down from 4.99 percent the previous year, and it will further decrease to 3.99 percent by 2027. Additionally, by 2030, the Tar Heel State will completely eliminate its corporate income tax. Georgia's income tax rate reductions would help close the gap between Tennessee and Florida, which don't have income taxes.

The bill's tax trigger mechanism, on the other hand, restricts Georgia's ability to attain the desired 4.99 percent rate. Despite its good intentions, the current design has several flaws. The trigger system does not meaningfully link rate reductions to the state's ability to afford them because it is not based on a predetermined baseline and instead relies on both revenue projections and comparisons to a changing benchmark of past years' revenue. This indicates that tax cuts may be postponed in years when the state is able to pay for them, but they may still be implemented in less prosperous years when the state would not otherwise choose to do so.

A well-structured trigger design may assist the state in ensuring that necessary revenues are maintained during tax cuts. However, Georgia may fall behind in the rapidly evolving tax landscape if it prevents affordable income tax rate reductions.

Legislators should think about setting a dollar amount benchmark that is adjusted for inflation and has reductions triggered when revenues exceed that benchmark by a certain percentage for a more efficient mechanism. If desired, the state can include an annual growth factor above inflation. This system prevents lawmakers from making the double error of either disregarding growth if it is gradual or mistakenly identifying a post-recession rebound as actual growth. It also allows for room for revenue growth if lawmakers choose a growth factor above inflation.

Georgia has already made a significant commitment to tax competitiveness by switching to a flat income tax. A true single-rate income tax will help shield taxpayers from inflation-related tax increases and provide a buffer against future rate increases, even though the state's top rate threshold is already very low. Georgia ought to develop tax triggers that enable the state to keep up with its rivals in order to combine these advantages with rate reductions for responsible income taxation.