Plans to eliminate or drastically cut personal income taxes and replace them with other levies are in vogue in several states. Georgia policy makers would do well to ignore the siren’s call.

Such a tax shift would do nothing to help the state’s economy. It would, in fact, hurt families and businesses by eroding Georgia’s ability to invest in schools, transportation, safe communities and other ingredients of a strong economy.

Moreover, hard-pressed Georgians would pay more of their income in other, less-equitable taxes, and the state would have less reliable resources for public needs. A strong case can be made to reform and modernize Georgia’s tax code, but dismantling the income tax should not be a part of the discussion.

The income tax has come under fire as policy makers seek ways to help create jobs and stimulate the economy, especially since the Great Recession and slow recovery have cost Georgia 340,000 jobs, an 8.2 percent decrease. With Georgia near the bottom nationwide in job creation and economic growth, some people are desperate for solutions.

Anti-tax activists contend lower income taxes are a tried-and-true way to unleash job growth. There’s only one problem: It isn’t true.

Cutting or eliminating state income taxes doesn’t create jobs any more than taking the gas out of the tank helps a car go faster.

In the Great Recession, the state that suffered the biggest percentage job loss was Nevada, which has no state income taxes. There, employment fell 13.6 percent between 2007 and 2011.

Florida, another no-income-tax state, lost more jobs after the start of the crisis than any other but California. For the first time since World War II, more people left Florida than moved there.

And in Texas, the oft-cited model for running a state without an income tax, job growth was lower than in “Taxachusetts” between 2008 and 2010.

This poor performance isn’t limited to a few cases.

During the first decade of the 2000s, all nine states with no personal income taxes grew more slowly than the nine with the highest income tax rates, according to a recent analysis by the Institute on Taxation and Economic Policy.

The high-income-tax states generally had greater economic growth per person as well as smaller declines in median family income. In other words, their economies were stronger. Residents earned more money.

Before going down a dangerous road, Georgia legislators need to remember how significant the income tax is to creating jobs and preserving the economy.

It provides the money to invest in quality schools, a quality health care system and a skilled workforce. All are more important than tax rates in attracting businesses. The income tax also ensures that Georgia has diverse and reliable ways to raise money, rather than being overly reliant on a single volatile source such as the sales tax.

The income tax is a key reason for Georgia’s AAA bond rating — the highest a state can have — which helps Georgia borrow at low interest rates to make long-term improvements, such as deepening Savannah’s harbor.

Dismantling the tax wouldn’t just make it impossible for Georgia to invest in the building blocks of a strong economy. It also would shift the cost of maintaining the public good to those least able to pay by increasing reliance on the sales tax, which is disproportionately paid by lower- and middle-income households.

Cutting or eliminating income taxes might sound good at first, but like a supposed short cut that turns out to be a lengthy detour, it’s a bad road map for where Georgia needs to go.

Alan Essig is executive director of the Georgia Budget & Policy Institute.

Heavily-influenced by the radical tax philosophy of Arthur Laffer, ALEC’s basic argument is simple:  states should drastically-slash or abolish their income taxes if they want to be competitive and create jobs. Speaking to a joint meeting of the House Ways and Means and Senate Finance Committees, the presenter laid out an eloquent case that states with either low or no income taxes, such as Texas and Florida, consistently outperform those with higher income taxes, such as California and Massachusetts. The gist was that Georgia needs to be more like Texas.

This probably sounds familiar, because it’s an argument most people have been hearing for years. And sure, it sounds pretty reasonable on its face. The problem? It simply isn’t true.

Earlier this week, GBPI featured a guest blog from Matt Gardner, the executive director of the Institute on Taxation and Economic Policy (ITEP), a nonpartisan research institute in Washington, D.C. The title speaks for itself—“Reality Check: High Rate Income Tax States are Outperforming No-Income-Tax States.”

We definitely encourage you to take a look. But just in case you don’t, let me leave you with a few fun facts about taxes:

• The worst performing state on jobs in the recent recession was Nevada, which saw employment fall by 13.6 percent between December 2007 and December 2011. They don’t have personal or corporate income taxes.
• In Texas, the much-praised model for income tax cutting, jobs grew at a slower pace between 2008 and 2010 than in fabled “Taxachusetts.” Texas also ties with Mississippi for having the highest percentage of minimum wage jobs in the country.
• In Georgia’s no-income-taxing neighbor to the north, Tennessee, residents face the highest average sales tax rate of any state in the country—nearly 10 percent.
• Another no-income-tax neighbor, Florida, has seen more people leave the state than move to it for the first time since WWII.
• And in New Hampshire – a no-income-tax state that the ALEC presenter praised as showing the power of “Yankee frugality” (yes, that’s a direct quote) –residents enjoy the third highest per capita property taxes nationwide. A fact that was conveniently omitted in yesterday’s presentation.

What ALEC’s selling on taxes might sound nice at first but Georgia’s leaders should be careful. Because it’s basically a bag of goods.

This Week in the Georgia Legislature

State Revenues
House and Senate Calendar
State Budget: FY2012 Amended and FY 2013
Fiscal and Tax Policy
Education Policy
Human Services Policy

State Revenues

State Revenues for the first seven months of this fiscal year are only running 4.5 percent ahead of the FY 2011 revenue collections, raising some doubt as to whether the Governor’s FY 2012 revenue estimate of 4.5 percent growth will be met.  January revenues showed weak growth of only 0.7 percent, which followed the 1.2 percent decline in December. Every 1 percent shortfall in the revenue estimate equates to an approximate revenue shortfall of $173 million. The Revenue Shortfall Reserve contains only $328 million. Even if revenues pick up in the remaining five months of the fiscal year to fully fund the FY 2012 budget, it is questionable whether such growth will drive a surplus large enough to fund both the Education Mid-Year Reserve and increase the Revenue Shortfall Reserve.

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House Bill 824 (HB 824) makes changes to the state’s K-12 education Equalization Program, which provides state funding to low-wealth school systems across Georgia. Proposed changes in HB 824 improve the program by shifting a larger portion of equalization funding to Georgia’s poorest school systems. However, proposed changes significantly reduce total funding earned for equalization program, which reduces the maximum amount of funding qualifying school systems earn. Furthermore, HB 824 does not adequately address the allocation of equalization funding in the event of future austerity cuts or the program is not fully funded.

The fact sheet highlights the key changes HB 824 proposes to the equalization program, the program cost, an overview of what the bill would do, and policy considerations. Download Fact Sheet.

ITEP’s Executive Director Matthew Gardner is our guest blogger this week:

Reality Check: “High Rate” Income Tax States are Outperforming No-Tax States

By Matthew Gardner, Executive Director, The Institute on Taxation and Economic Policy (ITEP)

For state lawmakers seeking to cut or repeal the personal income tax, there is no talking point quite as effective as the claim that doing so will lead to surefire economic prosperity.  Often embedded in these claims is an assumption that states without income taxes are booming, and that any state can enjoy that same success if they just get rid of their tax as well.

As it turns out, however, the reality is exactly the opposite.  My organization, the Institute on Taxation and Economic Policy (ITEP), recently released a report showing how the nine states without income taxes are faring relative to the nine states with the highest top personal income tax rates.  Given all the rhetoric we’ve seen in Georgia and around the nation about the “job-killing” nature of state income taxes, there are more than a few lawmakers and advocates that should find the results shocking.

Over the last decade, economic output per person has grown significantly faster in the nine states with the highest top income tax rates than in the nine states without an income tax at all.  And while “real” (inflation adjusted) median income levels have declined in most states, the drop has been much smaller in “high rate” states than in no-tax states.  To top things off, unemployment rates have been virtually identical across both types of states, which would undoubtedly surprise the countless lawmakers promising that an improved job climate will come hot on the heels of income tax repeal.

Source: The Institute on Taxation and Economic Policy

Georgia’s place in the overall picture is a bit of a mixed bag.  Unfortunately,Georgia is at or near the bottom in terms of the first two measures: growth in economic output per person and median income levels.  But in terms of the average unemployment rate between 2001 and 2010, Georgia is actually out performing six of the nine non-income tax states.

The bigger takeaway, however, is that lawmakers wanting to join the non-income tax club are simply idolizing the wrong states.  Most states without income taxes are doing worse than average on all three measures just described, and the states with the highest top tax rates are actually outperforming them.

So where is the myth about booming no-tax states coming from?  Many of the most recent claims are based on a misleading analysis generated by Arthur Laffer, long-time spokesman of a supply-side economic theory that President George H. W. Bush once called “voodoo economics” because of its bizarre insistence that tax cuts often lead to higher revenues.

This time around, Laffer has chosen to ignore key measures of economic success like unemployment rates and income levels, and to instead focus on more clumsy aggregate numbers like total growth in economic output and employment. But the aggregate numbers are heavily skewed by ongoing regional population shifts driven by a slew of factors like the housing market, population density, birth rates, immigration, and even climate. Moreover, Laffer makes no effort to account for the natural resource advantages buoying many no-tax states’ economies. As it turns out, three of the six states with the largest mining sectors, relative to their economies, don’t levy an income tax.  These states have thrived economically over the past decade for the same reason they were able to get along without an income tax in the first place—because they’re sitting on huge endowments of oil and natural gas.  

In terms of the economic factors that matter most to Georgia families – income levels, and whether or not they can find a job – the states with the highest top income tax rates are matching or exceeding the no-tax states.  It might take a while for the rhetoric on this issue to catch up with reality, but in the meantime I encourage you read ITEP’s new report: “High Rate” Income Tax States Are Outperforming No-Tax States.