ATLANTA — When Congress overhauled the federal tax code two months ago, Georgia officials didn’t initially realize how much extra money taxpayers would be giving the state.
Now, with the governor’s office estimating that Georgians will pay an additional $4.7 billion in state taxes cumulatively over the next five years, lawmakers are debating what to do with the extra funds.
Republican Gov. Nathan Deal, who is serving his last year in office, had hoped to defer the question until 2019. However, after receiving swift pushback last month from other GOP legislative leaders — including many running for higher office in November — Deal has a new plan: slash the so-called windfall by 75 percent before it even arrives.
To accomplish this, Deal introduced legislation Tuesday that would allow filers who take the standard deduction at the federal level to itemize deductions at the state level, which is currently prohibited in Georgia. This would let Georgians take advantage of a major increase in the federal standard deduction without being forced to take the state standard deduction, which is relatively low. Deal’s proposal also calls for increasing the state personal exemption by 25 percent.
It is difficult to quantify how much the average taxpayer would be affected under current law. A middle income family in Georgia — making between $40,000 and $62,000 annually — could see its federal tax burden decrease by about $600 annually, according to an analysis from the left-leaning Institute on Taxation and Economic Policy in Washington. At the same time, that family would likely see its state tax burden increase by about one-eighth of the amount its federal bill decreases, said Wesley Tharpe, a research director at the left-leaning Georgia Budget and Policy Institute.
Deal’s proposal would decrease that state tax burden.
Democrats argue that the extra money in the state’s coffers should be reinvested in state services, while some conservatives have immediately started pushing for tax cuts.
Sen. Michael Williams of Cumming, a GOP candidate for governor, said he plans to introduce a bill this session to cut Georgia’s top income tax rate from 6 percent to 4.5 percent.
“This is a tax increase,” Williams said of Deal’s proposal. “Windfall is a very pleasant word, but we are debating whether to take more in taxes or not. … We can afford to adjust our budget to ensure Georgians are paying less in taxes.”
Two other Republicans running to replace Deal, Secretary of State Brian Kemp and Lt. Gov. Casey Cagle, have not backed a specific proposal yet. But both have also said that the extra money should be returned to Georgia taxpayers.
Deal’s office considered cutting the income tax rate but said there is too much uncertainty to institute a permanent cut this year.
Meg Wiehe, deputy director of the Institute on Taxation and Economic Policy, agrees.
“Responding to the federal change needs to be done in such a way that it can be undone,” she said. “A number of states already have bills moving that would use every single cent of new revenue to cut taxes. … States could put themselves in a real fiscal bind going down that road.”
The difficulty in predicting how many taxpayers will itemize their returns adds to the uncertainty about the looming windfall’s size.
“Calculating these estimates is always going to be a bit difficult, so giving yourself a little room (through a rainy-day fund) is going to be appropriate,” said Nicole Kaeding, an economist at Washington’s conservative-leaning Tax Foundation. “But that doesn’t mean, however, to keep all of the money.”
Senate Minority Leader Steve Henson, D-Stone Mountain, also emphasized his desire for the legislature to proceed with extreme caution until officials know how much money will be coming in.
Once that is determined, Henson said, the funds should be used to give overdue raises to teachers and state employees.
“We need to make some of the repairs to the damage done during the Great Recession (and) make sure that it goes to the broadest number of citizens as we can,” he said.