In the recent gubernatorial primaries, much was said about eliminating various sales tax exemptions as a means to offset budget reductions. The General Assembly greatly facilitated this review with the passage of SB206 which requires an annual tax expenditure review to be submitted with the governor’s budget recommendation.
This bill was much needed because most policy makers to date have relied on an analysis done in 2004 (located here: http://aysps.gsu.edu/frc/files/Report170.pdf ) that shows sales tax exemptions costing the state $9.8 billion. With inflation adjustment this amounts to $10.96 billion in 2006.
This might seem like an extraordinarily high number and some politicians have pounced on these as special interest tax breaks. Here’s an examination of the feasibility of removing these exemptions.
Some exemptions support jobs
According to the report, $3.2 billion of the $10.96 billion is an exemption for raw materials used in manufacturing. No state taxes these materials and Georgia State University predicts that manufacturers would leave the state if this was repealed. Also related to business are exemptions for transportation related to interstate commerce ($670 million) and property manufactured for export ($736 million). Since many jobs are related to Georgia’s ability to export goods outside of the state, this could be a huge issue with the state’s reliance on the ports and world commerce.
The second major category is exemptions for sales to government entities. This is valued at $2.7 billion. Charging sales taxes to city and county governments would still come out of tax payer’s pockets. Taxing the federal government might also yield legal complications with the federal funds we receive for Medicaid and other federal-state partnership programs.
Subtracting the amounts above, there is about $3.46 billion left to consider. Some of these exemptions would be very difficult to eliminate because they impact many Georgians. $405 million of this amount is the exemption for apartments and other rooms rented for over 90 days. $1 billion is related to credit allowances for trade-ins on property. The report uses the value of a car trade in to describe this exemption. The report cautions that if this exemption were eliminated, dealers would reduce the value of the trade in to $1 and compensate by adjusting the price of the car.
This exemption, they project, would not yield much if eliminated. The sale of food for home consumption, now only taxed by local governments, is valued at $500 million, which might be low. Personal property brought into Georgia also has an exemption of $250 million. Prescription drugs and medical devices are exempt to the tune of $270 million. So are sales to schools and universities (including school lunches) which are valued at $115 million. These exemptions are not necessarily off limits but difficult to justify removing.
Some exemptions would be easy to remove
The remaining amount of $900 million does have some interesting items. There is growing frustration that hospitals alter their purchasing practices to qualify for non-profit status. The removal of this exemption would yield $246 million. Another palatable removal is the exemption on the sale of lottery tickets valued at $136 million. Also, collecting the sales tax on repair services would yield $154 million at least.
With growth in areas like education and Medicaid and with the loss of stimulus funds that have helped mitigate the cuts to date, a lot of these options might be on the table and should be. The General Assembly will have to carefully evaluate what helps the most people and creates the
most jobs and consider eliminating the rest.
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