Republicans unveiled their long-awaited federal tax-reform bill Thursday, closing loopholes and reducing rates across the board. There’s much work left to do, but it gets the ball rolling on one of the GOP’s last chances to enact a major piece of legislation before next year’s midterm elections.
It should also give renewed momentum to an update of Georgia’s tax code.
If you think the Reagan tax reform of 1986 was a long time ago, that’s a blink of an eye compared to the last major overhaul of Georgia’s individual income tax. According to a 2014 report from Georgia State University, it was in 1937 — 80 years ago — that the “bracket structure (was) established which remains, with minor modifications, in place today.”
When lawmakers have changed that basic structure, they’ve gone in the wrong direction. For example: In 1931, the top rate was 5 percent, and it kicked in at $20,000. That’s more than $310,000 in today’s dollars. Today, Georgians enter the top bracket of 6 percent at $7,000 (single filers) or $10,000 (married couples filing jointly).
But if Congress can close the deal on its tax-reform package, it will put pressure on state lawmakers to lower rates.
It’s simple: Georgia adopts taxpayers’ federal adjusted gross income, with a handful of exceptions, and then allows them to claim either the state’s standard deduction or their federal itemized deductions. So for the most part, your federal taxable income is the same as your state taxable income. (The biggest exception is for retirees, who get a generous income exclusion in Georgia.)
A tax reform that expands federal taxable income will thus lead to a sizable increase in state taxable income as well. Just as the increase justifies rate cuts federally, it demands the same at the state level.
For the moment, state leaders are keeping mum on the new bill. They saw the House GOP push through an Obamacare-repeal bill, only to watch the effort bog down in the Senate, and they haven’t forgotten.
They also have something of a head start because of work done in the 2017 legislative session.
You may recall a similar dynamic played out regarding state tax reform earlier this year. The House passed a bill that reduced Georgia’s unwieldy six brackets to a single, lower rate of 5.4 percent. A later version put the rate at 5.55 percent, which would have amounted to a $180 million tax cut — right at the upper limit of what observers believed Gov. Nathan Deal would sign.
The Senate balked because, according to several people with whom I spoke at the time, a number of senators and Lt. Casey Cagle wanted to pass a larger cut, even if that meant Deal would veto the bill. The bill stalled out. Cagle is now campaigning for governor on a plan to cut income taxes by $100 million.
His GOP opponents promise more, all the way up to eliminating the state income tax. That’s a few bridges too far: The individual income tax is projected to raise almost $11.5 billion in the current fiscal year, or just over half of all state tax revenues.
But given that state lawmakers have already charted a path to 5.4 percent, a federal overhaul could give them the space to go significantly lower. This tax reform could be doubly good for Georgians.