Philip L. Hinson, CPA
Georgians for Fair Taxation (GFFT) has been hard at work on a state tax reform proposal modeled after the national FairTax proposal, which enjoys widespread support in Georgia. Although the model would work somewhat differently at the state level than at the national level(1), the basic model would nevertheless address the primary concerns of state legislators in a balanced and economically sound way. State legislators and governors all over the nation are already seeking ways to:
(a) Compete more effectively in attracting business and industry, in order to
i. Expand their state’s revenue base, and
ii. Create good paying jobs for their citizens, and
(b) Do all of the above without unfairly shifting the tax burden to any subset of the population.
The FairTax model addresses each of these goals more effectively than any other known approach. The essential elements of the FairTax state model are as follows:
- Complete and immediate elimination of state income taxes – both individual and corporate;
- Revenue neutrality – when calculated statically, the model neither increases nor decreases the state’s revenues. However, due to faster economic growth, over the longer term, revenues increase at a faster rate than they otherwise would;
- Replacement of income tax revenues by broadening the sales tax base, not primarily by increasing the sales tax rate. This is accomplished in two ways:
(A) Services are added to the state’s sales tax revenue base, and
(B) The myriad of exemptions, exclusions, and special interest carve-outs in the current code are replaced with a simple, easy to understand and administer “prebate.”
GFFT commissioned Beacon Hill Institute (BHI) of Boston’s Suffolk University, one of this country’s leading economic and tax policy organizations, to calculate what the sales tax base would be and the associated revenue-neutral rate. BHI determined that the rate would be around 5½%. This rate compares quite favorably to the current rate; the effective FairTax rate for most Georgia families, net of the rebate, would be less than the 4% state sales tax they are now paying. In fact, a family would have to spend at four times the federal poverty level before their effective rate under the Georgia FairTax would equal the 4% they now pay. For the vast majority of Georgians, not only is the income tax eliminated, but the effective rate of the sales tax is reduced. Yes, more things are taxed under the new sales tax – there is no free lunch. But the rebate effectively protects those at the bottom of the economic ladder while making the consumption tax truly progressive in terms of the effective rate.
There is more good news concerning Georgia’s highly coveted AAA bond rating. Replacement of Georgia’s current tax system with the FairTax model will not negatively impact its bond rating. First, the empirical data clearly show that consumption taxes are more predictable and stable than income taxes. Second, there are 15 states with a AAA bond rating, the highest that Standard and Poor’s awards. Of the nine states with no income tax (on wages), four — almost half — have a AAA rating, a disproportionately high level of representation. In fact, a careful analysis of the current bond ratings of all fifty states over 7 rating categories does not support the belief that the presence of an income tax leads to a higher bond rating(2). Furthermore, according to ALEC (American Legislative Exchange Council), eight of the nine no-income-tax states rank in the upper half of the 50 states in terms of economic performance(3). Clearly, any concern over the FairTax having a negative impact on the state’s excellent bond rating is misplaced. There simply is no positive correlation between the presence of an income tax and a state’s bond rating – nor should there be, given the historical economic performance of the various states.
The FairTax was designed using a range of marketing techniques to find out what the American people as a whole wanted in a tax system. Not what Democrats or Republicans or independents wanted, but what all Americans wanted. This methodology effectively removed partisan bias from the resulting proposal to the maximum possible extent. That is one of its greatest strengths, as well as its greatest weakness. We live in a highly polarized nation, deeply divided by partisan differences. Our state and national legislative systems have become a microcosm of this unfortunate situation. FairTax supporters do not seek to impose a partisan agenda through tax policy. They simply wish to promote an approach to taxation that minimizes economic distortion and maximizes economic growth. This non-partisan approach creates immediate and strong opposition from some legislators and from ideologues in the general public. Conservatives often oppose the prebate, which totally untaxes the poor. Progressives sometimes reflexively oppose eliminating income taxes because of concerns about regressivity, while ignoring the protections provided by the rebate mechanism.
FairTax supporters have resisted temptations to modify the FairTax in an attempt to attract support from one side of the partisan divide or the other. As someone once said, if you are being attacked by both sides, you must be doing something right. We believe that we are doing something not only right, but something meaningful for Georgia and the nation. Georgia has a rare opportunity to set an important example for the nation. We can show the rest of the country that we are still capable of setting aside our partisan differences (as we once did) on issues of vital importance. We are capable of saying to the special interests: We are restoring the concept of equal protection under the law to our tax laws for the first time in 102 years. In essence, the FairTax model treats the entire 10.8 million population of Georgia as a single interest group and serves their interests, rather than carving up the electorate and pitting various factions against others or against the rest of the state. And perhaps most important, we are saying to the business community that Georgia is open for business, not via the path of crony capitalism, but through a truly innovative and creative approach to collecting the vital revenues that our state needs to ensure that our infrastructure measures up to the demands of the 21st century.
GFFT is having a bill crafted around the sales tax base and 5½% rate that Beacon Hill has calculated. It is expected that the bill will be dropped in the 2016 session of the General Assembly. While we understand that this will be a very tough battle, it is a fight that must be won. FairTax supporters are not yet ready to accept what 76% of Americans now believe to be our future: the next generation will have a lower quality of life than the generation which preceded it for the first time in our nation’s history(4). The “baby boomers” only have a few more short years to affect the legacy that they leave behind. As it stands right now, that legacy is not one that we can be proud of.
However, there is still time to change that belief. Finger-pointing and rigid political ideology won’t get it done. Thoughtful, open-minded consideration is required. We are confident that Georgia legislators and the public are up to the task.
(1) For example, payroll taxes would not need to be replaced at the state level.