Bill poses challenge to Georgia governor wary of big tax overhauls

Gov. Nathan Deal has signed dozens of measures since taking office that carve out hundreds of millions of dollars in special tax breaks.

But he’s opposed more substantive changes to the tax code that powerful Republican lawmakers have long championed.

Deal recently warned candidates aiming to replace him when he leaves office in 2019 to defy the “temptation” of broad tax changes that could jeopardize Georgia’s fiscal health. But his mantra may be tested this year with a measure to lower the state’s top income tax rate that could be one of the more substantive tax changes since he took office.

A growing number of conservative critics say the embrace of special-interest tax breaks makes it harder for lawmakers to pursue long-held dreams of cutting or phasing out state income taxes for all residents. They point to the annual parade of tax breaks as a threat to a more comprehensive tax overhaul.

“They hurt our ability to reduce the income tax rate,” Senate Finance Vice Chairman Hunter Hill, R-Atlanta, said during committee debate on some of the House-proposed tax breaks. “I would have liked to have seen a more comprehensive tax reform.”

The governor, though, recently reaffirmed his don’t-rock-the-boat taxing philosophy when he urged his successor — Democrat or Republican — to resist broad tax changes that could jeopardize the state’s revenue base.

“There are easy decisions in the short term that turn out to be problems in the long term,” he recently told Georgia Chamber of Commerce leaders. “Businesses, when they are looking for places they want to go, they want to go to a state that’s demonstrated it has its own fiscal house in order.”

For Deal, who leads a GOP-controlled state that could theoretically enact sweeping tax changes, the perennial debate is a perennial challenge.

In 2012, he signed the most comprehensive tax overhaul since he won the state’s top office — a measure that eliminated the state sales tax on energy used in manufacturing and replaced an annual property tax on motor vehicles with a one-time fee.

Since then, though, he’s ducked bigger efforts to overhaul the tax code while signing off on breaks and incentives for a range of special interests, such as economic development projects and budding industries. He’s vetoed a handful of them, raising alarms about their impact on the state’s fiscal health.

With this year’s session, Deal could confront a new challenge to his taxing ideology. The Georgia Budget and Policy Institute, a left-leaning fiscal think tank, tallies a dozen pending measures that provide direct tax breaks that would cost $445 million over the next five years. Four others restructure the state’s tax system.

Perhaps the most consequential was adopted with little debate this month when the Georgia House overwhelmingly approved a measure that would cut the state’s top income tax rate by 10 percent. It’s unclear how much the plan would cost to reduce the top rate of 6 percent — paid by singles whose income tops $7,000 and married couples who take in more than $10,000 — though estimates range as high as $154 million a year.

Lawmakers also could send other tax bills to his desk, including one that would mandate that e-retailers collect taxes on purchases by Georgians or submit sales data to the state, and another that would increase taxes on used-car buyers and cut them on Georgians who lease vehicles.

Deal said the argument that a swelling state bank account is a sign that the state is collecting too much in taxes is a flawed one. He said hefty reserves that top $2 billion send the message to corporate leaders that the state’s bottom line is strong.

“Sometimes, it is easier to make hard decisions in bad times than it is in good times,” he said. “In good times you’re susceptible to making bad decisions.”

And Deal has not shied away from picking a fight with anti-tax groups. With the help of business boosters, the governor and his allies have pushed the “bed tax” Medicaid provider fee to shore up health care funding and the 2015 package of fees and tax hikes to fund transportation improvements.

At the same time, broader changes have been sidelined, even as state lawmakers convene numerous commissions to consider overhauling the tax structure.

One of the most popular ideas championed by Republican lawmakers is a call for the state to lower income taxes while broadening the sales tax base — making Georgians pay a sales tax on services, for instance, to make up the difference. Despite flirting with the idea over the years, the measure has gotten little traction.

With their push to reduce income tax rates for the wealthiest Georgians, supporters hope they’ve found a sweet spot.

The House approved the measure to lower the top income tax rate with overwhelming support — and little Democratic dissent. The measure now goes to the Senate, which approved a similar plan last year.

That could make for a tough decision for Deal, who has declined to comment on the pending legislation. Capitol observers are quick to invoke Sonny Perdue, Deal’s predecessor, who shook up the statehouse when he vetoed two major tax bills that his fellow Republicans pushed through during his second term.

Jerry Keen, the House majority leader at the time, said he understood Perdue’s stance, even if he disagreed with it at the time. Governors have to consider bond ratings, which determine how much interest states pay when they borrow for construction projects. A good bond rating — which Georgia has — can mean tens of millions in savings. Bond underwriters like state revenue collections to be stable and predictable, he noted.

“As legislators, we want to do some things, and sometimes they have merit,” said Keen, who is now a lobbyist. “But you have to make sure the business, which is what the state is, remains healthy.”

Lobbyists, and the people they represent, play a key role in making broader tax changes more difficult.

Year after year, the Legislature’s two tax-writing committees hear pleas from special interests saying they can create more jobs if they get tax breaks. Sometimes the tax breaks are for an entire industry, sometimes for one or two businesses.

“It’s hard to do true tax reform because to do it, you have to do away with all those little tax cuts,” Keen said. “And there is a constituency associated with every tax credit.”

Kelly McCutchen, the president of the conservative Georgia Public Policy Foundation, has long been a champion of cutting income tax rates and broadening the sales tax base. He gives the House income tax measure good odds of winning final approval this year and said he hopes Deal will support it.

“I would think the chances of getting tax reform this year are the best I have seen in a decade,” McCutchen said.

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