One of the most obvious questions whenever taxes are discussed is “Who pays?”
It’s especially important to ask that now, as Georgia leaders consider changes to the state’s tax system. There’s talk of moving away from the current balanced reliance on personal income, corporate income, and sales tax to a system dominated by the sales tax. The Special Council on Tax
Reform and Fairness released recommendations Monday that are likely to include such a shift, though the magnitude of the shift is still unknown.
Too dramatic a shift from income to sales tax would be a radical idea with dangerous consequences. It would mean middle class families and vulnerable Georgians will foot more of the bill for educating our children, ensuring safe communities in which to raise our families, and providing access to affordable health care.
Here’s why. The more a household makes, the smaller the share of its income goes to paying sales taxes. That’s basically because a middle class family isn’t able to save as much as a wealthy family. More of the middle class family’s earnings go into purchases on which the sales tax is charged.
But the income tax is different. It’s levied more according to people’s ability to pay. The higher your income, the higher percentage of it you pay.
And, the state income tax has features that make it a tool not just for raising money needed to pay for necessities but also to balance out some of the negative aspects of the sales tax.
For example, the income tax allows us to recognize that different people have different needs. We all recognize that a family of four living on $50,000 is different than a single person living on $50,000. The family must provide housing, food, clothing, and other necessities for four people, while the single person only provides for one.
So our income tax system makes adjustments for that reality. For example, each person in the four person family receives a personal exemption ($5,400 for the parents and $3,000 for each child). The single person receives one $2,700 personal exemption. That all works out so that the family of four pays about $1,900 in state income tax on its $50,000 income, and the single worker pays about $2,500.
In contrast, the sales tax does not recognize that it takes a larger amount of income to provide for more people.
Beyond helping families through personal exemptions and child tax credits, the income tax also assists others, such as veterans, seniors, low-income families and persons with disabilities through larger exemptions and targeted credits.
The more that Georgia moves from the income tax to the sales tax, the more the cost of taxes is shifted away from people who can best afford to pay and onto those least able.
A better idea would be to maintain our balance of income and sales tax. The sales tax could be modernized to reflect today’s economy, where people spend more money on services that aren’t taxed than on actual goods, which are. Then the sales tax rate could be lowered. Revenues would be more stable and efficient in the long run, and the distribution would make sense.
Accompanying this with a robust, refundable earned income tax credit and other measures to ensure taxes are not shifted onto middle- and low-income Georgians would improve the situation even more.
It’s good that Georgia has begun a conversation about how to create a tax system that is adequate for meeting our state’s needs. Small changes in the balance between income and sales taxes should be part of that discussion. But responsible tax reform doesn’t shift the costs to middle class families and rely so heavily on one form of tax that revenues are unlikely to keep up with economic growth.
Sarah Beth Gehl is deputy director for the Georgia Budget and Policy Institute. Analysis and recommendations for comprehensive tax reform can be found at www.GBPI.org.