Benita M. Dodd, Vice President Georgia Public Policy Foundation, provides a prospective on tax reform. Visit the web site" www.gppf.org

Making the Case for Tax Reform

Commentary By Benita M. Dodd

The Tax Foundation came to town this week, telling Georgia businesspeople little they don't already know and policy-makers lots they need to get done.

Georgia's state and local tax burden - the percentage of personal income taken by the government in the form of taxes at all levels - has increased substantially since 1970, the Washington-based policy group told a crowd of more than 100 at a Georgia Public Policy Foundation Policy Briefing Luncheon.

"If you neglect your tax system, have a great education system, great roads, your well-educated kids are going to use your well-paved roads to look to other states for work," Tax Foundation economist Jonathan Williams told the group.

How important is that? In 2006, Georgia's tax burden was 10.4 percent of income, which ranked the state 25th nationally, according to "Georgia's Tax System: A Factual Foundation for Fundamental Tax Reform," a study released at the luncheon by the Tax Foundation. The study can be accessed at http://taxfoundation.org/news/show/2184.html

That ranking puts us smack in the middle of the nation and doesn't sound too bad. Until, that is, you consider that every neighboring state except North Carolina has a lower tax burden than Georgia. Then, being in the middle of the nation doesn't really matter. In fact, over the past 36 years, Georgia's tax burden has increased nearly 20 percent as a percentage of income, Williams said.

Tax burdens are an important measure, but no use unless you examine the tax structure, too, and show lawmakers the opportunities for tax relief. That's critical, as Williams pointed out, because taxes impact economic growth and "affect the bottom line more than anything else that the government influences with business."

The Tax Foundation developed the State Business Tax Climate Index to evaluate how competitive a state is in the regional, national and international marketplace. Studies have shown that states with good competitive tax systems do better in many areas, among them personal income growth, overall economic growth and population growth.

Georgia ranked 19th in the nation and third in the region in the State Business Tax Climate Index in 2006. The state ranks well on corporate taxes and sales taxes and about average on individual income taxes and property taxes.

"Every change that a state makes to its tax policy affects their relative competitive position to other states for capital investment," Williams said. Even more important, he added, "Competitively speaking, Georgia has little room for error in this region, because Florida has one of the most competitive business tax systems in the nation." Plus, Florida levies no individual income tax on its residents.

The Tax Foundation's principles for tax reform are commonsense:

In Georgia, for example, taxes that inhibit economic growth include the ad valorem tax on business inventories and the 4 percent state sales tax on energy costs for manufacturers, who say they are at a competitive disadvantage. Thirty-nine states - including Alabama, Florida, South Carolina, and Tennessee - exempt manufacturers from their state sales tax on energy.

Tax Foundation attorney Chris Atkins warned that Georgia should "proceed with extreme caution" before considering a return to the "dinosaur" of gross receipts taxes - a tax on the total gross revenues of a company.

Businesses don't pay taxes, Atkins reminded the group. Their tax obligation is passed on to workers in the form of lower wages, to customers in the form of higher prices or to investors in the form of lower dividends.

About a dozen states are making bipartisan moves toward fundamental tax reform, Atkins said. Realizing that taxes are a vital component in the competition for investment, they're working on removing impediments instead of playing favorites.

Fundamental tax reform in Georgia won't happen overnight. After all, February 3 is the anniversary of the ratification of the 16th Amendment, which authorized the income tax, in 1913 - and it's only gotten more complicated since.

A methodical, thoughtful approach that sets aside politics and hierarchy and focuses on sound policy should have as its foundation limited government, transparency and a broad, low tax base. That builds wealth for Georgia taxpayers and grows Georgia's economy.

Benita M. Dodd is vice president of the Georgia Public Policy Foundation, an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.

Benita M. Dodd
Vice President
Georgia Public Policy Foundation
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