Members of the Georgia House are set to consider a large income tax proposal this week that contains three sound tax policy reforms alongside one big problem. On the plus side, House Bill 329 proposes to create a new state Earned Income Tax Credit (EITC), close an expensive and outdated income tax loophole and index several broadly available exemptions to inflation to ensure they keep pace with economic growth. These are thoughtful, targeted ways to improve Georgia’s tax system. At the same time, the package regrettably replaces Georgia’s graduated income tax structure with a regressive flat tax, which should sound alarm bells for regular working Georgians. A flat tax rate leads to higher income tax bills for many low- and middle-income people, especially low-wage workers without children. Lawmakers can remedy the flat tax defect as the package evolves.
House Bill 329 passed the House’s tax-writing committee last Thursday and will likely get a vote by the full chamber Wednesday, March 1, 2017. Our two-page fact sheet released today describes the key tenets of the bill as it now stands. We have also updated our full five-page analysis of the bill first published last week to account for additional information about the legislation’s potential effect on state revenues.
The proposed restructuring in the House package carries varying implications for working class taxpayers. Most low-wage families with children stand to gain, while people at similar income levels without children stand to lose. This difference is due to interplay between adding a new EITC and a flat tax at the same time. Working parents rearing children would likely gain enough from the new EITC to offset the initial hike from the flat tax, due to the sizable benefits the tax credit provides them. However, swapping Georgia’s graduated income tax for a flat-rate system raises taxes for low-wage workers without children, in some cases substantially.
Imagine a young man without children earning $8 an hour at a local shop or restaurant, putting in 30 hours a week. He brings in about $12,000 a year, putting him right at the federal poverty line for an individual. The latest version of HB 329 imposes an estimated annual tax hike of $126 on that worker.
It’s not surprising that a flat tax results in higher tax bills for low-wage workers without children. Income taxes are typically higher for low- and middle-income people in states with flat tax rates. That’s an upside-down outcome technically known as a regressive tax system. For example, taxpayers in the middle 20 percent of the income range in states with flat-rate taxes pay an estimated 3 percent of their annual earnings in income taxes, compared to states with graduated-rate taxes, where families in that range pay only 2.4 percent. The gap between flat-rate states and graduated-rate states is even wider for taxpayers at lower levels of income.
Lawmakers can avoid the tax hike on low-wage workers by keeping Georgia’s graduated tax structure in place, even if that’s paired with a modest rate cut. Most lawmakers and commentators are linking the proposal to flatten Georgia’s structure and the rate cut to 5.4 percent as a unified policy reform. The reality is such restructuring includes two distinct policy choices—cutting the tax rate is one and creating a flat tax is another. Cutting the rate and embracing a flat tax don’t need to move in tandem.
If Georgia’s leaders are committed to cutting Georgia’s 6 percent top rate, that can happen within the state’s graduated structure. Families would still pay 1 percent on their first $1,000 of taxable income, 2 percent on their second $2,000 of taxable income and so on, as they do under today’s system. They would simply pay whatever lower top rate lawmakers deem reasonable once the top rate kicks in at $7,000 of taxable income for a single taxpayer and $10,000 for a married couple.
The proposed tax restructuring is a nuanced, multipart tax package that offers some positive changes for many Georgia families. But the headline-grabbing flat tax at the core of the bill is the wrong choice for Georgia taxpayers. It counteracts many of the bill’s other potential benefits and provides another barrier hindering many low-wage Georgia workers from reaching the middle class. If the state’s top income tax rate is destined for a change, lawmakers can make the cut within Georgia’s traditional graduated system. That still provides the desired reduction in the state’s upper income tax rate without saddling vulnerable Georgians working their way up the economic ladder with a corresponding tax hike.