Georgia’s Plan to Eliminate Income Taxes Would Burden Businesses

A Georgia special legislative committee proposal to eliminate the state income tax by 2032 may sound like an appealing way to reduce tax burdens. But the proposal lacks specifics on how the state would offset the loss of revenue. Revenue shortfalls can spur the implementation of new taxes or a large administrative burden of complying with expanded existing taxes.

Georgia’s current budget surplus may mask the immediate revenue consequences, but reinstating a personal income tax once eliminated would be politically impossible. Lower revenue would force lawmakers to face tough choices: higher rates for other taxes, entirely new taxes, or broader tax bases for existing tax bases. The uncertainty created by the prospect of future revenue shortfalls would undermine Georgia’s reputation as a business-friendly state.

While a plan that reduces the income tax burden on lower-income taxpayers may benefit those individuals, a complete upheaval of the state’s tax regime has broader implications.

Personal income taxes account for roughly 50% of the state’s annual tax revenue. The proposal doesn’t address how Georgia would make up for the revenue—but promises it wouldn’t be through increased sales taxes, increased state property taxes, or a reduction of government services.

This isn’t realistic. Many of the report’s explanations rely on generalized studies suggesting that lower tax rates spur growth. For example, the report focuses on the economic benefits of lower income tax rates as a boon for the economy, but lower (to no) taxes for the majority or individuals isn’t the same as eliminating income tax altogether.

As the report notes, 72% of personal filers contribute only about a quarter of income tax revenue. And eliminating a major tax revenue source (the income tax) would also diminish the effect that each new Georgian has on the state’s revenue. In other words, if the state gained $100 in tax for each new citizen in income and sales taxes, that benefit would go down about 50%.

The report also cites the elimination of certain tax credits and incentives as increasing revenue. But it incorrectly assumes that removing an incentive automatically translates into higher tax collections. Businesses make location and investment decisions based on predictable incentives. If Georgia eliminates a data center sales tax exemption, the state won’t suddenly regain that previously exempted tax revenue. Rather, the data center may never exist in Georgia at all.

Overhauling the state’s tax regime by eliminating its largest revenue source has administrative implications, too. Unlike other types of locally administered taxes—sales taxes or property taxes—personal income taxes are relatively simple for both taxpayers and the Georgia Department of Revenue. That’s because personal income tax keys off the federal income tax code and filings, and state and federal systems are synced to share information. That also allows Georgia to efficiently collect other state debts out of state and federal income tax refunds. And rather than create tax law and guidance from scratch, Georgia can simply conform to the federal laws and rules.

Shifting the Department of Revenue’s focus from personal income tax to the administration and enforcement of other types of taxes requires funding new employees and infrastructure. The personal income tax auditors and systems synced to the IRS can’t simply be redeployed for a different tax type.

For example, if the department focuses more on corporate income taxes, it will need to hire new auditors with expertise in that area. This would require corporate taxpayers to prepare for more, or more aggressive, audits. Expanding the sales tax base (which is collected by Georgia businesses and remitted to the Department of Revenue) would require the department to create new guidance/procedures, while businesses would have to figure out how to comply.

Finally, reduced state revenue may mean shifting the burden of expenses to the local governments. In that case, local governments may look to raise their existing sales tax rates. They also could increase other locally administered taxes like the occupation tax, which is a significant administrative burden on multijurisdictional businesses.

The income tax elimination proposal is so far just a proposal. It would need to go through the legislative committee process, be voted on by the legislature, and approved by the governor before becoming law. And Georgia’s legislative process would require a fiscal note estimating the expense of a proposal. That fiscal note may estimate many of the expenses and revenues shortfalls.

Nonetheless, before overhauling Georgia’s tax revenue system, the legislature should carefully consider all potential costs and endeavor to provide clarity an as to what any tax policy shifts would mean to taxpayers.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Alla Raykin is a partner at Asbury Gardner focusing on state and local tax controversy and litigation matters.

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