Tax Analysts Blog

Base-Broadening and Rate-Lowering Remains a Good Idea

Posted on Feb 10, 2016

Georgia Senate Finance Chair Judson Hill (R) is proposing two good tax policy measures, which my liberal friends will hate but which warrant serious consideration. The first, SB 280, would reduce the personal income tax rate from 6 percent to 5.4 percent; eliminate all itemized deductions except those for mortgage interest, charitable contributions, and medical expenses; and limit the mortgage interest deduction to $25,000. The standard and dependent deductions would also be raised -- a lot.

Why is SB 280 good? Because it would broaden the base and lower the rates, which is almost always a good idea. A broad base and low rates reduces inefficiencies, minimizes the impact of taxes on the market, and decreases administrative and compliance costs. Some people won't like this measure because lowering rates means people get to keep more of their money, but people like having their money in their pockets. Besides, Hill's plan is hardly radical. He would cut the rate from 6 percent to 5.4 percent -- hardly Atlas Shrugged material.

SB 280 would also eliminate the corporate net worth tax. Whether you're a liberal, a conservative, or a Martian, you must admit that net worth taxes are horrible tax policy. The problems are obvious. The tax is imposed without respect to profitability, so start-ups and businesses caught in an economic downturn pay. That is true of all property taxes, of course, but the difference between a property tax on business capital and a property tax on real property is plain -- business capital can be moved and real property cannot. Taxing mobility in a world where governments are competing for business doesn't work. And net worth, franchise, and capital stock taxes vary significantly in the states that still impose them. The bases include net worth, capital stock, capital stock plus surplus, and personal property, with formulas tied sometimes to revenue and sometimes to profits. It's even more complicated when large multinationals must apportion those taxes with conflicting bases. The tax is almost always imposed in addition to the corporate income tax, which is itself pretty complicated. Why a state would purposely impose these burdens on its business community is beyond me. The tax is bad for the businesses and citizens of Georgia.

Hill's second proposal, SR 756, is a constitutional amendment that, if approved, would automatically lower personal tax rates depending on the growth of state revenue and reserves. The details are complicated. The amendment would mandate a decrease in the top personal income tax rate of two-tenths of a percent if, beginning in 2017, state revenue exceeds $23 billion and the state reserve fund exceeds 7 percent of revenues, or at least $1.61 billion. In following years, revenue would have to be greater than $23.6 billion and the reserve fund would have to be greater than 7 percent of revenue, or at least $1.65 billion. As long as revenue continues to exceed $23.6 billion and the reserve fund is at the appropriate level, the tax rate could continue to decrease in 0.02 percent increments until the rate reaches 5 percent.

Again, this is hardly radical. The top rate would drop to 5 percent. SR 756 reflects a view that the government does not have an inalienable right to your money. I must admit that I'm always a bit wary of automatic tax cuts, but this measure seems to require a substantial reserve. It might be better if there were an emergency override -- perhaps a supermajority requirement -- but still, this is a good idea.

It's unclear whether these will become law. Revenue measures must originate in the Georgia House, and it's unclear whether anyone will take up Hill's ideas, but Georgia policymakers should consider these proposals, particularly SB 280.

A version of this post appeared in State Tax Notes.

 

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