Georgians won’t know how much they’ll pay in federal taxes until after Congress decides how it will alter the tax code.
They may wait even longer to find out what they’ll pay in state income taxes.
Income taxes are the state’s No. 1 source of revenue, and because of the uncertainty, Gov. Nathan Deal is trying to put final touches on the budget he will propose to lawmakers in January not sure of exactly how much money the state will have to spend.
Figuring that out includes some guesswork every year, but with less than a month to go before the start of the 2018 session, state officials are nervously waiting to find out whether the federal tax code changes Congress makes as it works on a final version will mess with their well-prepared plan.
Weeks before the start of Georgia’s legislative session, it’s unclear whether the federal tax plan could mean more money for the state because Georgians will lose key deductions on their state income taxes. Officials don’t know the impact of any last-minute add-ons or subtractions to the bill, which are common in horsetrading at both the state and U.S. Capitol.
Equally unclear is whether cutting federal taxes will give Congress incentive to reduce spending on programs such as Medicaid, which provides health care to about 2 million poor and disabled Georgians and is the biggest single expense in state government.
Because of all that, the governor’s office, budget and tax staffers and top lawmakers are keeping a close watch on what Congress does in the weeks leading up to the Jan. 8 start of the 2018 General Assembly session, when lawmakers will consider a $26 billion state spending plan for the upcoming year.
"You can stay awake worrying about what will happen," said state Rep. Terry England, R-Auburn, the chairman of the House Budget Committee. "As quick as things change, what you were worrying about is not the thing you have to worry about now."
Among the things lawmakers will have to decide if Congress passes the tax plan: which provisions should apply to the tax code the state uses to collect more than $12 billion a year in state income taxes. Legislators will have to approve a bill coupling, or decoupling in some cases, the federal and state tax codes during the 2018 session. What they do will have an impact on the state income taxes Georgians pay. Doing so may be trickier than ever.
One federal provision that could bring more state revenue — and cost some Georgians slightly more in income taxes — is one that would eliminate the ability of filers to deduct the state income taxes they pay from their taxable income. State lawmakers have debated that provision — eliminating the deduction for state income taxes — several times.
Experts who have studied the issue say it could be a windfall — worth tens of millions of dollars, or more, for the state — because it would mean Georgians who itemize would pay the current 6 percent top state tax rate on more income. That would only affect Georgians who take itemized deductions on their tax forms, a number that may diminish if, as expected, Congress raises the standard deduction. The elimination of other itemized deductions could also mean money for the state as well.
Georgia is one of only five states that allows filers a deduction for state and local income taxes on state returns.
If Congress’ final plan includes the elimination of the state income tax deduction, state lawmakers will have to decide whether to approve it for state tax filers. Doing so — absent any other tax changes — would be a tricky election-year maneuver because it would be a tax increase on those who decide to continue taking itemized deductions on their taxes.
Deal’s office has been monitoring the tax debate closely for other reasons as well: how it could affect the construction industry, an important part of Georgia’s economy.
The governor sent a letter to Georgia's members of Congress asking them to keep tax programs that state agencies, local governments and nonprofits have used to help pay for construction projects, including college dorms and cafeterias.
When asked about the impact of the tax plan, the governor’s chief of staff, Chris Riley, would only say, “The governor is confident the Georgia congressional delegation will not vote to put Georgia in a negative financial position.”
State officials are concerned killing the borrowing program — as the U.S. House proposed — and hampering construction spending would have a negative impact on the state's economy. Real estate groups have also raised a cry that the bills would make the mortgage-interest deduction less valuable and limit the deductions on local property taxes.
Supporters respond with their own suppositions: that cutting income taxes will spur the economy, create jobs and produce more state revenue because Georgians will be earning and spending more.
"By and large, as long as they keep the focus on a tax reform plan that is pro-growth, pro-job creating, I can support that," said House Speaker David Ralston, R-Blue Ridge.
Congress may not be the only group cutting taxes next year, something that could also affect the state’s bottom line in fiscal 2019. There could me a “me too” statehouse residual to Congress’ efforts.
State legislators love to cut taxes, or at least talk about doing so, in an election year. In 2018, Georgia voters will be picking a new governor and lieutenant governor, and filling all 236 legislative seats. Every candidate would love to run on having just cut state income taxes.
Lawmakers are almost certain to reconsider legislation that passed the House earlier this year cutting the maximum 6 percent state income tax rate. The Senate passed a similar plan, as it did in 2016 , but a final compromise was never reached.
A key senator expressed support for giving the issue another try in 2018.
"There may be some compromise here … the (top) state income tax of 6 percent has not been cut since 1955," said state Sen. Chuck Hufstetler, R-Rome, the chairman of the Senate Finance Committee. "I would like to get something done this year. I just want to make sure it is fair to everybody."
Ralston said his chamber will continue pushing the idea.
“I think it is a priority and will be a priority to get something through that will lower the income tax burden on Georgians,” Ralston said. “It’s important that we let Georgians keep more of the money they earn, and it stimulates job growth. I hope we can get some things done.”
While state leaders have voiced overall support for tax cuts, those who are writing the budget also are keeping an eye on how Congress pays for them. Shortly after the U.S. Senate approved its version of the tax plan, some Republicans began talking about cutting spending.
U.S. House Speaker Paul Ryan, R-Wis., said congressional Republican will aim next year to reduce spending on both federal health care and anti-poverty programs to reduce the country’s deficit and long-term deficit.
The Joint Committee on Taxation, a nonpartisan group of experts, estimated the Senate tax bill would add $1 trillion to the national debt, even after accounting for economic growth it says will be generated by the tax cuts.
When federal funding is included, the state of Georgia spends about $45 billion a year. A little over 30 percent of that goes to the Department of Community Health, which runs Medicaid and provides health care to the poor, disabled and nursing home services to the elderly. About two-thirds of Medicaid is paid for by the federal government, so any cutback could have a dramatic impact.
In addition, Congress has yet to reauthorize the money that pays for the popular Children's Health Insurance Program, called PeachCare in Georgia, which has been around for about 20 years and is also run by the Department of Community Health.
Laura Colbert, the executive director of Georgians for a Healthy Future, said her organization is “very concerned” that Medicaid reductions could be in the offing after the tax bill gets approved.
“Earlier this year we saw proposals to block-grant Medicaid or restructure its funding to provide less money to serve the same number of people,” Colbert said. “We are really concerned with the tax bill … that those proposals will be revived and that we will again have to look at what restructuring would look like here.
“When we are talking about cutting Medicaid at the state level, you are really talking about cutting health care to children, seniors and people with disabilities.”
Health care advocates aren’t the only ones concerned. Not long after the Senate passed the tax bill and lawmakers began talking about spending cuts, teacher groups sounded the alarm as well. Education ranks with public health as the two biggest expenditures — and targets — in state government.
Sid Chapman, the president of the Georgia Association of Educators, a leading teacher group, said the tax bill’s passage would pave the way for Congress to look at sharply decreasing spending to reduce the size of the national debt, which is expected to grow due to the tax cuts.
“It is irresponsible to put funding for public education in Georgia at risk,” he said. “This potentially could translate into over $1 billion in cuts to public education in our state at a time when it is still recovering from substantial austerity cuts. It could also mean the loss of over 12,500 jobs to educators and overcrowded classrooms that would deprive students of one-on-one attention.”
With a month to go before the start of the 2018 session, lawmakers say they can’t worry too much about the “what ifs” until Congress acts.
“There is just such uncertainly with what is going on up there,” Ralston said. “We have kind of watched this year with the (Obamacare) repeal and replace debate, and now with the tax reform debate.”
That uncertainty is most acute on health care funding, he said. “At some point, when we get into (writing) the budget, we are going to have to make some tough calls.”
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