New Report Highlights Impractical “Tax Shift” Plans

Legislative proposals to drastically cut or abolish Georgia’s state income taxes and replace them with higher sales taxes would raise taxes on most Georgia families, harm businesses and communities and critically weaken the state’s economy.

Those are the conclusions of a new Georgia Budget and Policy Institute report that explores the potential impacts of legislation filed this year that would cut or eliminate the source of half of Georgia’s revenue, the income tax.

Sometimes referred to by misnomers such as the “fair tax,” these plans are best understood as proposing what’s called a tax shift. That is because rather than cutting taxes across the board or reforming the tax system as a whole, they simply shift the responsibility for funding state government downward. They raise taxes on low- and middle-income families, drop them for wealthy households and large corporations and make up the difference through deep cuts to Georgia state services.

The new report describes how enacting some form of tax shift plan in Georgia would:

• Raise taxes on most Georgia families – Swapping the income tax for higher sales taxes would require a combined state and local sales tax rate as high as 14.5 percent and increase total taxes on up to 80 percent of Georgia taxpayers, depending on details of the final plan. This would increase the cost of basic necessities, potentially including items such as groceries and prescription drugs that are exempt under current law.

• Cripple Georgia’s shared investments – Passing tax shift legislation in the state would likely prompt deep budget cuts on top of those already enacted in since the recession. Similar legislation passed last month in North Carolina is expected to result in more than $600 million worth of annual cuts to state services – an amount roughly equal to that state’s entire budget for technical schools.

• Weaken Georgia’s economy – Tax shift supporters typically tout big income tax cuts as a proven roadmap to boost the economy or create jobs, but these are false promises unsupported by the evidence. Drastically slashing income taxes would likely hobble Georgia’s economy by leading to deep cuts in the ingredients of economic growth, such as education and transportation.

• Harm, not help, most Georgia businesses – Contrary to popular belief, a radical shift from income to sales taxes would not be a boon to Georgia businesses. It could raise the taxes of many small businesses and hurt the private sector in other ways, such as driving Georgia shoppers across state lines or to online shopping. A scuttled tax shift plan in Louisiana would have raised taxes on in-state businesses by an estimated $500 million per year.

Two tax shift plans are set to be considered by the Georgia General Assembly when it convenes next January, although the proposals to date lack key details. As these plans add specifics we’ll continue to update the estimates described in the report, but this impractical idea isn’t new, so chances that we’ll see some wrinkle that mitigates the problems identified in the study are slim to none.

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