The Entrepreneurial View #478                                                               

Tax Cuts in Georgia

by Raymond J. Keating

The economy is stuck in a rough stretch.  So, what are politicians in the states doing in response?

Rather than thinking of policy changes that would spur the economy forward, many state lawmakers are worried that tax revenues will not keep pace with their free-spending ways. So, despite the obvious economic negatives, various elected officials around the nation are dreaming up ways to hike taxes.

But there's a different legislative battle going on in Georgia. Lawmakers are arguing over tax cuts. Unfortunately, as the legislative session approaches its end, infighting might result in no tax cut at all. It looks like it's going to be a close call.

On Friday, the Georgia state senate passed a 10 percent across the board cut in the personal income tax.  The reduction would be phased in over five years, with the top rate eventually dropping from 6 percent to 5.4 percent.

Previously, the state House had voted to eliminate Georgia's car tax.  After the Senate vote, however, the House wound up passing a package that did both - eliminate the car tax and cut the income tax. 

That's the best of both worlds, or it might seem so.

Unfortunately, under the House bill, the income tax cuts would not begin until 2011, and not be fully phased in until 2015. In addition, the income tax would not be reduced unless voters approve the elimination of the car tax.  Such delays and stipulations regarding a lower income tax rate merely creates uncertainty, and puts off any positive economic impact for seven years.

Meanwhile, Georgia Governor Sonny Purdue, a Republican, reportedly is opposed to either tax cut. But he has also spoken about reducing state spending.

Of course, the best possible scenario for the Georgia economy would be to combine three good ideas, that is, eliminating the car tax, immediately reducing the income tax rate, and implementing real cutbacks in government spending. That would give a boost to incentives for working and risk taking in the state, while constraining the resources that government sucks out of the private sector.

Georgia is competing with the other states, as well as globally, for entrepreneurs, capital and labor.  For example, on the "Small Business Survival Index 2007," which ranks the states according to their public policy climates for entrepreneurship, Georgia ranked a very respectable twelfth in the nation.  Reducing the tax burden - particularly income tax rates - would further improve the state's competitive position.

And if other states were foolish enough to raise taxes in this environment, Georgia and its economy would look even better.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.