Another round of tax reforms was introduced at the State House last week, and chances are it will lower your tax bill.
After two measures taken in 2018 — and a third scrapped in 2020 as the global pandemic threatened to wreck state finances — Georgia House management’s new plan would make the tax code flatter, simpler and lower. than ever.
The tax code would drop from six brackets capped at 5.75% to a single rate of 5.25%. Importantly, more income would be exempt from tax. For example, a typical family of four would have $30,000 tax-free, compared to $20,500 today.
“We believe this tax cut will make us more competitive for earners at all income levels,” said Rep. Shaw Blackmon, the Bonaire Republican who chairs the House Tax Drafting Committee. “This plan lowers the rate and significantly increases the flat-rate exemption.
“It’s simple, it’s fair and it allows Georgians to keep more of their money.”
Opponents of a flat tax often wonder how the policy can possibly be fair to low-income workers. They say it will hurt poorer taxpayers to pay the same rate as wealthier ones. But the numbers don’t support their arguments in this case.
To assess the proposal, I calculated the tax bills of Georgians living at the poverty line today, and what they would pay under the new bill. I assumed they were claiming the standard deduction rather than itemized deductions, which is a safe assumption at their income levels.
I then looked at married couples with zero, one, or two dependents living at the poverty line, that is, earning $18,310, $23,030, or $27,750, respectively. All now owe state income tax. Under the new legislation, they shouldn’t have anything.
That’s right: zero state income tax.
Taxpayers filing as head of household – think single parents with children under 18 – would see less dramatic declines. But their tax bills would be even lower.
Then I doubled the incomes of each example so that they were twice the poverty line. They saw reductions in each case, ranging from around $100 to over $400.
Here’s another way to think about the changes: many taxpayers could make more money than they do today while paying the same or less in taxes. This is a powerful incentive because it means workers keep more of their money when they earn a raise. This is the opposite of the “welfare cliffs” problem I spoke of recently, where higher wages lead to even greater losses in public assistance.
Seen in this light, taxpayers at these lower income levels could earn hundreds, and in many cases thousands of dollars more and have the same tax bill they have today.
An example: A married couple with no children today earning a poverty wage of $18,310 would pay about $74 in income tax. Under the new plan, they wouldn’t have to pay $74 in tax until they hit $25,410 in income, an increase of more than $7,000.
Why does the calculation work this way? One of the reasons, as I mentioned before, is that the increase in untaxed income is so significant. The more untaxed income you earn, the better off you are. And low-income workers have more of their income sheltered from tax.
But another reason is that our current tax code is barely progressive. Single taxpayers reach the highest rate after only $7,000 of taxable income; for families, it’s $10,000. These income levels were established years ago, when they represented relatively larger sums of money, and have never been adjusted for inflation. Georgia has a long history of applying a nearly uniform tax.
Making it officially flat will save Georgians of all income levels money.