Georgia Should Reinforce Its Tax Reform Intentions

Taxes

Georgia lawmakers brought a tax reform package across the finish line in 2022 that will change the state’s progressive income tax to a 5.49 percent flat tax beginning in 2024, with triggers to provide additional rate reductions. This is an important step forward, but if the state truly wants to cement its status as a competitor in an increasingly mobile post-pandemic economy, lawmakers should consider strengthening their reforms.

The last two years have been marked by a distinct focus on state tax reform and competitiveness, with many states cutting their individual or corporate income tax rates. And for good reason: the ongoing shift toward flexible and remote work has freed up both businesses and employees to be much more mobile than they ever were before. The numbers show that, by and large, people are moving out of high-tax states and into low-tax states with strong economies.

Georgia’s revenue trigger mechanism in the 2022 bill is intended to give the state an edge in this competitive landscape by bringing the income tax rate down to 4.99 percent over time. This targeted rate would bring the state just below neighboring Alabama (5 percent) and put more distance between itself and South Carolina (6.5 percent). North Carolina already has a low individual income tax rate of 4.75 percent, down from 4.99 percent last year, and it will fall further to 3.99 percent by 2027. Additionally, the Tar Heel State is entirely phasing out its corporate income tax by 2030. Tennessee and Florida have no income taxes, so income tax rate reductions on Georgia’s part would help narrow this gap.

However, Georgia’s ability to reach the target 4.99 percent rate is limited by the bill’s tax trigger mechanism. Although well-intended, the current design has several issues. Because it is not based on a predetermined baseline and relies instead on both revenue projections and comparisons to a changing benchmark of past years’ revenue, the trigger system does not meaningfully connect rate reductions with the state’s ability to afford them. This means that tax reductions might be delayed in years when the state could afford them, but could still potentially be triggered in leaner years when the state would not otherwise choose to lower rates.

Maintaining necessary revenues during tax cuts is important, and a well-structured trigger design could help the state ensure this. However, putting roadblocks in the way of affordable income tax rate reductions could set Georgia back in the rapidly changing tax landscape.

For a more effective mechanism, lawmakers should consider setting a dollar amount benchmark (adjusted for inflation) with reductions triggered when revenues surpass that benchmark by a specified percentage. The state can include an annual growth factor above inflation, if so desired. This system promotes revenue stability—or allows room for revenue growth, if lawmakers opt for a growth factor above inflation—while avoiding the twin mistakes of disregarding growth if it’s gradual or mistakenly identifying a post-recession rebound as actual growth.

By shifting to a flat income tax, Georgia has already made an important commitment to tax competitiveness. Although the state’s top rate threshold is already very low, a true single-rate income tax will help protect taxpayers from inflation-related tax increases and provide a buffer against rising tax rates in the future. To combine responsible income tax rate reductions with these benefits, Georgia should create tax triggers that empower the state to keep pace with its competition.