Last week this column began a review and discussion of ideas that either have been floated on tax reform or are being discussed at the present time. Please remember there is no tax bill at this time. Legislators are discussing various tax reform theories and there will start to be projections of how various proposals would affect income tax rates or other taxes affected. There is a widely felt belief that lowering state income taxes promotes economic growth and advocates point to the growth in states with no income tax as proof.
Last week, we looked at business energy and agricultural inputs-the energy tax, the issue of adding food sales to state sales tax collections, and casual sales of automobiles and other vehicles.
This week, we will look at other issues, such as communications sales tax, shifting income taxes to sales taxes, tobacco taxes, and CAPCO’s tax exemptions. This is information only and it is possible that none or only part of these proposals would be part of a tax proposal.
Income tax to sales tax shift
This has been proposed in varying scenarios but in short, this proposal would lower the individual income tax and raise the sales tax so that about the same amount of tax is collected. This proposal results from a philosophical belief that consumption should be taxed and not income. There have also been variations of this to address a serious concern. Our current sales tax only taxes goods and generally not services. It also does not contain a consistent system to deal with online sales from retailers who do not have a physical presence in Georgia. As we move to an economy that relies on more services and online sales these will be important issues to raise.
Communications sales tax
FY2013 Estimate: $166 million increase.
Georgia’s current tax structure on communications taxes provides preferential treatment to some providers based solely on the type of infrastructure they use to deliver product. For example, phone service provided over the internet (VoIP) is not taxed while traditional landline service is taxable. In addition, some communications providers are subject to local franchise fees where others are not. Furthermore, going back to the concept of “production inputs,” providers of taxable communications services are also required to pay sales and use taxes on much of their capital equipment inputs, which leads to tax cascading to consumers of the end product.
This proposal would repeal the current sales and use taxes as well as the franchise fees on video and telecommunications services. It would instead implement a 7 percent excise tax on all communication services (excluding internet access which is protected by federal law). The proposed change would also provide for sharing revenues with local governments receiving to replace lost franchise fees and other revenue. Several states are attempting to modernize their communication services tax, with North Carolina repealing franchise fees in exchange for a broad 8 percent tax on video and communication services. When this issue was proposed last session, satellite TV users flooded legislators with e-mails objecting.
FY2013 Estimate: $320 million increase.
Though there are many scenarios, most proposals would increase the tobacco excise tax from $.37 to $1.37 per pack. Until 2003, the per pack excise tax was $.12 per pack until it was raised to its current level. Currently Georgia is 48th among states in the amount of excise tax levied. Among our neighboring states, Georgia became the lowest when South Carolina raised their tax from $.07/pack to $.57/pack. Currently only seven states, including Georgia, Alabama ($.43/pack), and North Carolina ($.45/pack) have taxes under $.50 while 30 states have taxes over $1/pack.
Proponents argue that this tax would have an added benefit of reducing health care expenditures in Medicaid and other government subsidized health care. In 1993, the latest a study was conducted, tobacco related illnesses accounted for over $200 million in Medicaid expenses. Opponents concede that smoking would decrease and point out that Georgia is considered a tobacco producing state and reduced smoking would hurt the state financially. There is also a concern that raising the price beyond what neighboring states charge would drive sales outside of Georgia particularly along state borders.
FY2013 Estimate: $125 million loss.
CAPCOs, or certified capital companies, are private companies that invest in small businesses with the intention of generating jobs. Typically what happens is that insurance companies invest in CAPCOs and receive a $1 tax credit for every $1 contributed. Senate Bill 203, amended by the House to permit CAPCO, would allow $125 million in tax credits in exchange for $125 million invested. CAPCOs use the money to invest in companies with less than 100 employees and with a presence in the state.
There are not any performance targets for the CAPCOs — just the requirement that the money be invested at least once. The CAPCO is permitted to retain a 2 percent administration fee, operating costs and an allowance for taxes. Once the CAPCO has invested the money at least once, it also retains the money without restriction (in this case $125 million collectively). Proponents argue that with unemployment high this is a method to encourage investment at a time when capital is tight.
Secondly, they also assert that the private sector is the preferred actor in determining good investment decisions. Opponents usually argue three points. The first is that without performance targets, there is no incentive for CAPCOs to maximize the number of jobs created. The CAPCO is considered to have met its obligation whether one job is created or 1,000 are created.
Second, the CAPCO receives an extraordinary payment though it only administers the money and isn’t required to invest any of its own funds. At the very least, it retains a guaranteed profit along with operating cost. At its maximum it could reap the principal $125 million in addition to any investment gains - all without investing any of its own private funds.
So, once again this session, taxes will be a key issue. I hope citizens will think about these issues and let us hear from you.
I may be reached at
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E-mail at Jack.Hill@senate.ga.gov
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