ATLANTA — A new study suggests the growing share of income earned by the rich could raise the costs of a Republican proposal to replace Georgia’s income tax with an expanded sales tax.
The new study by S&P shows that income gains to the top 1 percent of earners come at a larger cost to the rest of earners. Not only does rising inequality appear to stunt overall economic growth, but S&P links it to a slowdown in average yearly growth in state
Most U.S. economic activity is driven by consumers. But they become less likely to spend their money as median incomes have remained nearly flat for 30 years and remain lower than at the beginning of the Great Recession in 2007. Median household incomes, adjusted for inflation, were $54,045 in July, about 4.6 percent lower than in late 2007.
As part of the study, researchers compared states more dependent on income tax collections, such as Georgia, against states more reliant on sales tax collections. The findings suggest that states with a progressive income tax could better offset the drop in tax growth than states tightly tied to the sales tax.
That finding could have political implications in Georgia, where Republican lawmakers have endorsed replacing the state’s income tax with an expanded sales tax, known to supporters as the “FairTax.” Tellingly, senior Republican leaders have taken major steps to implement such a system. The S&P analysis did not take any position on Georgia’s tax system.
“It would be the perfect storm of bad tax policy,” said Alan Essig, executive director of the Georgia Budget and Policy Institute and a former deputy policy director for Gov. Roy Barnes, a Democrat. Essig was not involved in the S&P study. “If their analysis is correct, it is another strong argument against the FairTax and the importance of having a balanced tax stream.”
The weak economy has proven a political constraint. Tax collections took a dive during the Great Recession, though they have been climbing upward. Ranking Republicans appear reluctant to jettison the income tax while collections are low, possibly forcing deeper, unpopular spending cuts in core government services such as education, health care and public safety services.
Sen. Judson Hill, R-Marietta, a supporter of the consumption tax, disputed the premise that putting more income in the hands of the wealthy puts a damper on economic growth.
He said that some “of these individuals at higher incomes will hire more people and create new companies, which will provide opportunity for everybody at every income level.”
He has pitched variations on the consumption tax theme. For example, businesses on Georgia’s border could see losses if Georgia switched to a consumption tax and neighboring states kept lower sales tax rates. Shoppers would have an incentive to buy expensive items in Alabama, Tennessee or the Carolinas to save money on big purchases.
To avoid that imbalance, Georgia could reduce its income tax rates by charging the sales tax on more goods and services, Hill said.