Wall Street reviews Georgia’s new limit on individual income tax rate

By David Pendered

While political pundits review Georgia’s elections outcomes, Wall Street analysts have focused on the passage of an amendment to the Georgia Constitution that’s the first of its kind in the nation.

Sen. David Shafer introduced the measure to limit individual income taxes.

Sen. David Shafer introduced the measure to limit individual income taxes.

Moody’s Investors Services issued a report Friday that raises a cautionary flag over the amendment that caps Georgia’s individual income tax rate at 6 percent. The limit restricts the state’s ability to raise revenues, if necessary, the report observes.

Georgia was one of 11 states included in a report intended to inform investors about ballot initiatives that could have a “material credit impact.”

Moody’s report does not suggest the credit rating agency will take any action to alter the state’s credit rating, which is the highest rating available. In addition, the report highlights Georgia’s historically fiscal conservative budget policies.

The concern Moody’s cited in Georgia involves the fact that personal income tax is the state’s largest source of revenue.

By setting a constitutional limit on the tax rate for the largest potential source of revenue, Georgia has removed one tool that could be used to raise funds as needed.

That, of course, was the intent of sponsors at the state Capitol when they passed Senate Resolution 415. Senate President Pro Tem David Shafer (R-Duluth) was the lead sponsor. Gov. Nathan Deal signed the bill into law on April 22.

Advocates contended the cap would improve Georgia’s competitiveness. According to Sen. Buddy Carter (R-Pooler), as quoted in ballotpedia.org:

  • “Although somewhat symbolic, capping the rate at this level would improve Georgia’s competitiveness while bringing certainty to businesses contemplating expansion decisions in our state.”
Nearly half of Georgia's current budget, 47 percent, is funded with revenues collected through the individual income tax, according to Moody's Investors Service.

Nearly half of Georgia’s current budget, 47 percent, is funded with revenues collected through the individual income tax, according to Moody’s Investors Service.

Georgia voters supported the amendment by voting for it Tuesday by a three-to-one margin, according to unofficial elections returns.

Moody’s report observes that individual income tax accounted for 47 percent of the state’s current budget – generating $9.5 billion of the state’s $19.7 billion general fund budget, according to Moody’s.

The great recession showed the state’s vulnerability to any significant drops in personal income. State revenues plummeted during the recession, tracking the drop in wages and other income of Georgia residents.

Georgia has taken five years to reach the pre-recession level of income tax collections, following drops of 11 percent in Fiscal Year 2009 and 10 percent in FY 2010, according to the report.

The report observes:

  • “A significant strength of state management lies in its broad powers and resources to manage its finances in the face of volatility. Georgia’s constitutional cap has stripped the state of that option with respect to its personal income tax. While it is not uncommon for a state to enact tax reform, Georgia will be the first to put a constitutional cap on its tax rate.”

The report goes on to outline the outcome in states that also have cut tax rates – though not through constitution amendments:

  • “While we do not view tax policy changes as negative, we have seen recent examples of tax cuts resulting in lower-than-expected revenue performance, which can be a credit challenge. North Carolina (Aaa stable) reduced its income tax rate from a tiered 6 percent, 7percent and 7.5 percent to a flat tax rate of 5.8 percent and experienced a year-over-year decline of 6.2 percent in individual income tax revenues during fiscal 2014, while Kansas (Aa2 stable) experienced a year-over-year decline of 32 percent in fiscal 2014 after cutting income tax rates.”

The report notes that Georgia’s 6 percent income tax rate is “average,” compared to neighboring states: South Carolina’s rate is 7 percent; Alabama’s rate is 5 percent; Florida does not levy an income tax; and Tennessee taxes only capital gains.

David Pendered, Managing Editor, is an Atlanta journalist with more than 30 years experience reporting on the region’s urban affairs, from Atlanta City Hall to the state Capitol. Since 2008, he has written for print and digital publications, and advised on media and governmental affairs. Previously, he spent more than 26 years with The Atlanta Journal-Constitution and won awards for his coverage of schools and urban development. David graduated from North Carolina State University and was a Western Knight Center Fellow. David was born in Pennsylvania, grew up in North Carolina and is married to a fifth-generation Atlantan.

10 replies
  1. The Last Democrat in Georgia says:

    Burroughston Broch  At this point, Georgia state government needs to “get off the pot” and move to reduce if not eliminate the state income tax.  The recent economic downturn which saw state revenues crash through the floor proves that the state income tax will never be increased, even during an emergency situation.
    This constitutional amendment to cap the state’s income tax at 6% is just a gimmick that the state is using to stall on taking action to eliminate the income tax because the state both does not want to give up the revenue and seems to be afraid to replace the income tax with an increased state sales tax.Report

  2. Burroughston Broch says:

    The Last Democrat in Georgia And you claim to be a Democrat? Don’t you believe your party’s line that sales taxes are regressive and hurt the poor?
    Kidding aside, the highest state sales tax rate in the US is 7.25% while ours is 4%. According to http://www.usgovernmentrevenue.com/year_revenue_2015GAbn_16bs1n_40#usgs302, GA expects $10.3 billion in income tax and $6.9 billion in sales tax for FY 2015. For sales tax to replace income tax, the state sales tax rate would have to increase to 10%. Add a local option sales tax and a MARTA tax onto that and you have 12%. How politically palatable would our populist leaders find that?Report

  3. The Last Democrat in Georgia says:

    Burroughston Broch The Last Democrat in Georgia  {{“How politically palatable would our populist leaders find that?”}}
    …You have an excellent point that raising sales taxes to a level of 10-12% is not very politically palatable (despite the fact that the state income tax would be eliminated)….Which is why the Georgia Legislature passed a constitutional cap of the state income tax instead of eliminating it and replacing it with a higher state sales tax.
    Though I have major doubts that any action will ever be taken, the current talk swirling around the state legislature proposes to only reduce the state income tax to 4% and increase the state sales tax to 6%.
    Though even that modest proposal would likely be politically unpalatable because many local governments like to collect revenue by levying local option sales taxes (like the increasingly highly contentious SPLOST that just again passed in Cobb County on Election Day).  Raising the state sales tax even as little as 1 or 2 percentage points, much less 5 or 6 percentage points, would most likely make it impossible for counties to get voters to continue to support their already increasingly contentious SPLOST proposals.
    It is because of the political unattractiveness of significantly increasing state sales taxes as well as the dependence of local governments on SPLOST revenue that we will likely not ever see much if any action on significantly reducing, much less eliminating the state income tax.Report


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