The Georgia Special Council on Tax Reform met at Mercer University's Atlanta campus on September 8, 2010.  That meeting focused on testimony from several experts on tax and tax policy.

Speakers at this meeting included:

• Matt Gardner, Institute on Taxation and Economic Policy
• Alan Essig, with the Georgia Budget and Policy Institute and Kelly McCutchen with the Georgia Public Policy Foundation
• Jim Eads, Federation of Tax Administrators and
• Panel Discussion with Joseph Crosby, COST; Mike Petrik, Tax Policy Committee of the Georgia Chamber of Commerce; John Masters, Georgia Society of CPAs; and Nick Masino, Gwinnett Chamber of Commerce.

Chairman of the Council, A.D. Frazier, opened the meeting noting that the Council would not take a formal vote on adoption of its guiding principles at this meeting.  Rather, that action would be taken at a later meeting.  This Council works for two clients, from Mr. Frazier's perspective: David Ralston, Speaker of the House of Representatives, and Casey Cagle, the Lieutenant Governor.

Mr. Frazier expressed that the Council had worked hard and were all likely to have developed "saddle sores" with their travels around the State.  So far, 385 individuals have attended the six public fact finding forums; out of those, 90 individuals provided testimony with many speaking out on the same issues (such as agricultural exemptions, nonprofit sales tax exemptions, etc.).  He also urged everyone to look at the Council's website: http://fiscalresearch.gsu.edu/taxreform/ .

Gardner

Matt Gardner led the presentations acknowledging that Georgia, like many other states, was in a "fiscal jam."  Georgia has two problems: a short term deficit and a longer-term structural deficit.  Georgia has experienced a forty-year decline in revenue; however, recently that decline has experienced double digit declines.

Georgia's sales taxes are too narrow due to the exemptions enacted.  There are likely some purchases which should be taxed (such as internet sales items) that are not currently being taxed.   Sales to other businesses should be exempt (the end user is actually the consumer not the business making the product).

The corporate income tax should be repealed.  Income tax has wide tax breaks which impacts the yields.

The "sin taxes" have systemic structural problems.  The sin taxes (such as cigarette and alcohol taxes) have slow growth and are regressive.

Income tax: He noted that many states are looking at income taxes as an interesting area of reform.  The question is whether to change the base or the rate of taxation.  Closing loopholes will help raise revenue.  Mr. Gardner favored changing the base for the income tax.  He also discussed itemized deductions and how some states addressed those (such as Rhode Island repealed all of them; Hawaii capped the dollar valuation of itemized deductions).  Also, last year, Georgia passed an expanded income tax exemption for retirees (phasing it out entirely by 2012); other states have passed similar laws, but in Ohio, it recently eliminated that retiree exemption.  Meanwhile, Mississippi is proposing to cap the retiree exemption at $25,000. North Carolina has recommended the elimination of itemized deductions.  California proposed flattened tax rates with a standardized deduction of $45,000 per married couple and the elimination of credits.

Capitol gains: Four of twelve states have repealed or made major reductions of their capital gains preferences (Colorado, Rhode Island, Vermont, and Wisconsin).

Gardner discussed South Carolina's recommendations for tax reform.  Some of the recommendations included that everyone must pay something under the income tax.  Also income tax brackets are to be adjusted and there is to be no tax floor.  Another recommendation was to increase capital gains for South Carolina-based investments.  The recommendations also included senior citizen tax breaks (for income other than Social Security).

Sales taxes: Mr. Gardner noted that Arkansas was taxing services.  Among those services included dry cleaning and haircuts.  Other states were proposing taxing digital downloads such as North Carolina, Vermont, and Wisconsin.  "Amazon" laws have been proposed to tax internet sales transactions in the states of North Carolina, New York, and Rhode Island.  South Carolina also narrowed its base by exempting groceries (New Mexico has also exempted groceries but raised the rate of sales tax on everything else).

Corporate income taxes: Mr. Gardner highlighted the enactment of "combined reporting" to eliminate multi-state profits.  He also mentioned the greater disclosures of information and strengthening minimum tax.  There are some states which have opted for repeal of the corporate income tax including South Carolina, Ohio, and Texas.  There have been a number of corporate tax criticisms including the loopholes.  Business tax incentives, however, do come at a cost.  Rhode Island, he noted, enacted the Job Development Act.  Arizona also enacted the Alternative Fuel Credit.

He also encouraged the Council to look at the "neglected tax" or the State's gasoline tax.  That tax has decreased over time as a share of personal income.  States have a sales tax component to their gasoline tax.

Other suggestions made included:

Broadening the base is the most sensible approach;

Remember that no tax break is sacred;

Rate reductions are possible;

Link tax rate reductions and economic development; and

Quantify the "bang for the buck" and preserve the tax breaks that provide a return.

Mr. Frazier inquired whether Georgia's Tax Council was organized differently than councils in other states.  Mr. Gardner noted that most of the other councils were not designed to develop legislative strategy.  He thought the timing of the creation of this Council in Georgia as being very timely.

Christine Reis inquired if Georgia flattened the base and lowered the rates whether that would impact economic development – Mr. Gardner remarked that it was too early to tell.  He suggested that some of his strategies were more long-term in nature.

Essig and McCutchen

This panel provided an overview of Georgia's tax system.  Essentially, Georgia's tax system is what was in place in the 1930s.

In terms of how Georgia's money (tax revenues) is used, Mr. Essig broke down annual expenditures noting that Georgia expends 56 percent of its money on education. Other areas of the State's budget are expended as follows: health, 16 percent; public safety, 10 percent; debt service, seven percent; transportation, four percent; human services, three percent; and other four percent.

Georgia has historically been a low tax state.  It ranked 48^th for state tax revenue and has a structural deficit of $1.8-$2 billion. Georgia is also the 19^th most regressive state.  It provides preferential treatment through credits and exemptions. He acknowledged that Georgia has a good tax foundation but one that needs modernization.

Under sales tax policy, Mr. Essig noted it should be diverse and broad-based.  Volatility should be examined.  Also, Georgians spend more now on services yet they are not taxed on those services.  Mr. Essig suggested taxing services (not medical, legal or education services). He suggested the creation of an earned income tax credit for low earners and the elimination of special tax breaks.  He also urged closing loopholes.

With respect to income tax, he suggested broadening the base, increasing standard deductions, modernizing the income tax brackets, and enacting refundable earned income tax credits.

For corporate tax ideas, he suggested evaluating and revising exemptions and current credits.  He further suggested looking at the rate for corporate tax as that has not been raised.

Other ideas Mr. Essig proposed included looking at Georgia's excise tax on cigarettes.  It is one of the lowest in the nation.  He also recommended raising motor fuel excise tax rates and re-enacting the State credit for the estate tax as Georgia loses $125 million when the federal government eliminated that credit.

Mr. McCutchen suggested that the Council look at long-term effects and at all types of people in developing new policy recommendations.

Mr. McCutchen outlined "rankings" of where Georgia was, in comparison to other states, on its taxation.  For 2010, the State Business Tax Climate ranked Georgia at 29^th in the country and the Small Business Tax Index ranked Georgia at 21^st place.

Georgia has experienced weak growth in terms of its revenue.  He also suggested broadening the base with the exception of taxing business inputs.   Mr. Frazier remarked that would also likely include energy tax and agricultural taxation. Neighboring states do not tax energy.

Tax structure decisions do have a real impact on businesses.  McCutchen noted the huge investments made by the broadband industry yet Georgia taxes that equipment.  Gross receipts is another issue.

Georgia has a number of income tax exemptions.  Elimination of some of these would possibly raise as much as $3 billion.  He also suggested expanding the base for personal income tax.  Georgia's capital gains tax is the most volatile.  Some questions need to be answered – such as what type of economy does Georgia envision? One answer is that it should be seeking to be innovative.  In that regard, Georgia should be creating companies.  Presently, Georgia's capital opportunities are limited yet Georgia has become a pipeline for new business (with the Georgia Research Alliance and the incubators at research institutions).  Georgia's corporate tax will not apply to entities which are set up as "limited liability companies" or "subchapter S" corporations; in those instances, individual income is taxed.

If Georgia were to implement a flat three percent tax, the State could target a tax credit to help lower income families to offset any "fairness" concerns.  Pennsylvania has a flat tax with a "tax forgiveness" process.  Mr. McCutchen indicated that Georgians had failed to claim $2.7 million in these types of credits.

Essentially, "tax reform" should maximize economic opportunity.

Mr. Frazier stated that, if Georgia were to tax services, such as healthcare, they would not be able to collect.  This was because of the third-party payers involved.  Additionally, one cannot tax the federal government which also provides many healthcare services.

The Council intends to visit the business incubators.  They are interested in the loss of manufacturing jobs yet dollar outputs have increased because of efficiency.    Mr. McCutchen cautioned that recommendations should avoid "pyramiding" or "cascading" of taxes.

Dr. Reis inquired about the imposition of sales taxation on food.  Mr. Essig acknowledged that implementing sales tax on food would solve the adequacy issue but there would be a problem caused for lower income families.  He suggested an earned income tax credit or refundable income tax credit (which Georgia has already eliminated). However, the Council's tax accountant stated that he favored "simplicity" and this type of idea may only complicate matters.  Also, for the State to get a credit, a federal credit would be necessary to be obtained first.  Mr. McCutchen stated that families could receive help with the credit through United Way and H & R Block (which provides some tax services for free to low income individuals).

Eads

Mr. Jim Eads stated that there was no magic formula to manage tax reform or an economic downturn.  Taxes, though, should be adequate, impose the least harm, be fair, have low costs to administer, and take into account the tax burden.

Mr. Eads talked some about sales of goods through the internet.  Georgia has passed the Streamlined Sales Tax Agreement which will address on-line sales (however, the State has not been accepted as a member entity as of yet to this agreement).  That law becomes effective in Georgia in January 2011. A federal initiative, along the same lines, the Main Street Fairness Act has stalled and its author is not seeking re-election.  "Amazon" laws are tackling relationships with affiliated entities. Colorado has enacted a requirement so that internet sellers must disclose to the state names of individuals that were sold goods and what was sold to those persons; the state will then contact the purchaser to tell them they owe tax (this is fraught with peril according to Mr. Eads).  Texas also sent letters to taxpayers for items which were bought outside of the country; they bill the consumers.

The Federal Tax Administrators conducted a survey three years ago on taxing of services.  Their survey looked at 168 services.  Currently, Georgia taxes 36 services.  Neighboring states in the south tax the following numbers of services as follows: Alabama (37); South Carolina (35); Virginia (18); Tennessee (67); Florida (63); and West Virginia (105).  When Nebraska considered taxing services, it also looked at neighboring states to determine what it might tax.

Regarding income tax, he suggested "combined reporting" for a unitary group so that the state would tax the larger pot of income.  Most states in the west are using "combined reporting."  Other states have considered such including Alabama, Connecticut, Florida, Iowa, Louisiana, Montana, New Mexico, North Carolina, Pennsylvania, and Tennessee.  He also alluded to the use of "UDITPA", which acts similar to the Uniform Commercial Code, but only half of the states have adopted it and it would "apportion" multi-state income.

He talked some about the use of "non-traditional" taxes in terms of taxing of businesses.  Examples presented were Ohio which taxes commercial activity; New Hampshire which taxes "business enterprise"; and Texas which taxes "margins."  However, any changes done in Georgia should be done with a plan of transition and with the education of taxpayers.

There are currently 15 bills pending in Congress concerning taxation ideas.  A couple of those mentioned included the Cell Tax Fairness Act; Main Street Fairness Act; State Video Tax Fairness Act; and Business Activity Tax Simplification.  One of those mentioned was the tax impacting the on-line travel companies – companies have proposed not taxing the full amount of the hotel cost to consumer; rather just what a room might be worth and not the "service fee" which is attached.  (Example: a customer pays $150 for a hotel room when the room actually costs $100 with a $50 fee to the company making the booking; the tax would be applied solely to the cost of the room, or $100.)

Mr. Eads also cautioned about the taxing of business inputs (or cascading).  He suggested taxing of gross receipts which would be levied on the business doing the selling (that tax will essentially operate like a sales tax).  Mr. Eads mentioned that sales by charitable organizations (such as the Girl Scouts) are exempt from sales taxes in New Mexico.

Sales taxes are higher in the states of Tennessee and South Carolina.  These states do not have income taxes.

Panel

The panel felt that Georgia's Tax Code (which does not capture all taxes imposed in Georgia) should be left alone.  It should be maintained to attract businesses and jobs.  The tax burden should be kept low for Georgia to be competitive with other states and not used as incentives to make the deal.  They pointed to the state of Minnesota which has a fairly large number of large corporations headquartered in that state where its citizens enjoy a good quality of life; however, taxes there are not small.

The panel also expressed that the tax reform should "do no harm" in terms of making changes to attract economic development.  Businesses react poorly to wide change. 

Broadening the sales tax was among their ideas.  However, the big-ticket sales tax exemptions relate to business inputs. 

Georgia's current corporate income tax is not pushing businesses away from the State.  It was expressed that individual income tax was needed but without the exemptions and refundable credits.  Taxing of businesses should be done with "smart growth" in mind.  Georgia should eliminate sales taxes on businesses and should also eliminate energy, computers, and telecommunications.

They further suggested excluding services from sales taxes with the exception of certain identified services.  Essentially their thoughts on services, which should be taxed, included car repairs and haircuts.

Panelists also reminded the Council to keep taxes fair, simple and reliable.

The Department of Revenue should also be allowed discretion in implementing tax policy.

Mr. Petrik also expressed that tax laws should have the input of the Georgia Society of CPAs, the State Bar of Georgia, and Atlanta Bar Association. One panelist argued that some laws written now are almost impossible to have accompanying rules and regulations written to implement them, even though lawyers were aware of the intent of the General Assembly when the laws were passed.