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Tax changes in the coming session
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In the final days of the 2011 legislative session, tax bills dominated the conversation in both chambers. Ultimately it was decided that the issue would be postponed until the 2012 session. In a couple of weeks, that next session will be on us.

This week and next, we will review the current revenue structure of the state and briefly look at each of the components of proposals both past and present.

Before we start discussing these tax changes, it might be helpful to review the system currently in place. The state funds budget is currently $18.3 billion. This includes all state sources including lottery transfers from the Georgia Lottery Corporation. Tax revenue (simply defined as the amount collected by the Department of Revenue) accounts for about $16 billion. Taxes we will discuss this week currently are estimated to collect the following in FY2012:

Individual income tax: $7.9 billion or 50 percent of tax revenue
State sales and use tax: $5.3 billion or 33 percent of tax revenue
Corporate income tax: $673 million or 4 percent of tax revenue
Tobacco excise tax: $216 million or 1.4 percent of tax revenue

Tax revenues and the state budget are intertwined because of our balanced budget requirement.  When taxes are cut (or raised) an inverse amount is reflected in the budget. In past columns we have discussed the status of the budget, the future projections of cuts to come and looming unknowns such as federal cuts. As these proposals progress, it will be important to determine whether Georgia is willing to change the level of services provided in the state budget, which might be necessary as a result of either tax reform or revenue cutbacks.

These are the tax issues we will offer information on over these next columns:

Business energy and agricultural inputs
Resuming state tax on food for home consumption
Casual sales of automobiles and other vehicles
Communications sales tax
Income tax to sales tax shift
Tobacco tax

Business energy and agricultural inputs

FY2013 estimate: $160.8 million loss.

Inputs, also called “production inputs” or “intermediate goods” are the raw materials purchased by businesses for the production of finished goods, the products that consumers purchase and use. Currently all states exempt the taxation of raw materials used in manufacturing. This is primarily done because of “tax cascading” materials. As goods move through the various levels of production and particularly at the point of consumption, taxes paid on inputs get included in the cost of finished goods, and consumers end up paying “tax on taxes.”

In 2006 the exemption of the sales tax on the sale of raw materials used in manufacturing was valued at $3.2 billion. The sale of machinery used in manufacturing, also exempt, was valued at $100 million in lost revenue.

Two tax reform measures being considered by the General Assembly would expand the exemption of business inputs to energy and agricultural inputs. This proposal would exempt the purchase of fuel used by manufacturing, agriculture, mining, and publishing firms in their production process from the state sales taxes. Currently Georgia is only one of 10 states that tax energy inputs and is the only one among our neighboring states that do so. Proponents of this change argue that this will make Georgia competitive among high energy consuming manufacturers deciding where to locate or expand. This proposal also would simplify and expand the exemptions of agricultural inputs. For example, the carpet industry is a high energy manufacturing process and there is wide support for removing this tax from the manufacturing process.

Resuming state tax on food for home consumption

FY2013 estimate: $500-$600 million increase.

This proposal would remove the state sales tax exemption on food for home consumption with the exception of food purchased with food stamps or WIC. Groceries were taxed until 1996 when the state, under Gov. Zell Miller, phased out the tax.

Currently local governments are able to assess local 3 percent sales tax on food. According to the Federation of Federal Tax Administrators, only 17 states currently impose a state and/or local sales on food (including Alabama, Tennessee and Mississippi). Proponents argue that eliminating this exemption will strengthen the sales tax base and allow lower income taxes.  They also point to the inconsistency of taxing based on the location where purchased. A piece of chicken purchased in a restaurant is taxed, but if the same chicken is bought in a grocery store, it is exempt. Opponents are against this because groceries are a necessity and will hurt low income families with tight budgets. 

Casual sales of automobiles and other vehicles

FY2013 estimate: $151-$166 million increase.

Georgia currently does not levy sales and use tax on casual sales of automobiles, watercraft and aircraft. The term casual refers to sales outside of those made by licensed new and used vehicle dealers, whose sales are subject to the 4 percent state sales and use tax.

This proposal would expand the sales tax to cover the approximately 30 percent of used vehicle sales that are done outside of this traditional network. The state would assess the tax at time of registration and would be based on the book value of an automobile (similar to the way the ad valorem tax is assessed by counties). Currently, 44 states levy taxes on casual sales. Proponents argue that this will create a level playing field between new and used car dealers and casual sellers.

Next week: We will continue this review with a discussion of the communications sales tax, income tax to sales tax shift, tobacco tax and CAPCO.

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