Georgia’s poorest residents will pay a larger share of their income this year in state and local taxes than the wealthiest earners, according to a new study from the Institute on Taxation & Economic Policy, a nonprofit Washington think tank.
That burden could grow as Republican lawmakers in the state legislature push for lower income tax rates while offsetting lost revenues with increases in sales taxes.
It’s a trend showing up in many states, splitting the next big tax debate not just along partisan political lines but socioeconomic lines as well.
According to the study, income inequality will grow wider and tax revenue for local governments will decrease if the trend continues.
For some of Gainesville’s minority and working-class residents, this is a self-evident fact.
“It’s something we all know,” said Alan Sturdivant, who cuts hair and trims beards at Randolph’s Barber Shop on Athens Street in Gainesville. “The people that call the shots, that make the rules, we never see them.”
Georgia’s richest 1 percent of residents, whose household income exceeds $432,000 a year, pay just 5 percent of their income in state and local taxes — income, property and sales — according to the study.
That rate grows as income falls, with the bottom 20 percent, who earn less than $16,000 annually, paying 10.4 percent of their income in state and local taxes.
The study, which ran the numbers on state and local taxes in all 50 states, reports the poorest fifth of Americans will pay 10.9 percent of their income in state and local taxes in 2015.
Meanwhile, the middle-fifth will pay 9.4 percent and the top 1 percent of earners will dole out an average of just 5.4 percent of their income to support state, county and municipal governments.
While the wealthy pay a higher percentage in state income taxes, the middle-class and poor pay more in sales and excise taxes. That means the cost of basic necessities, everything from food to gas, hits the wallets and purses of low-income families much harder.
“That is why the proportion is so different,” said Dewey McClain, a Democratic state representative from Lilburn and president of the Atlanta North Georgia Labor Council, an AFL-CIO affiliate.
The poor also pay a larger percentage of their income toward property taxes, with homes often representing their single largest asset. Payroll taxes, which fund Medicare and Social Security, also weigh heavier on them.
Unlike the graduated federal income tax system — which is considered “progressive” because the more an individual earns, the greater percent of their income is taxed — state and local taxes are considered “regressive” because, for example, everyone pays the same sales tax rate.
Political conservatives argue that’s why sales and consumption taxes are fairer. Rep. Emory Dunahoo, R-Gainesville, said he supports consumption taxes in favor of income taxes to pay for needed infrastructure and transportation projects.
Rep. Butch Miller, R-Gainesville, said he supports cutting state income taxes and increasing sales taxes, but acknowledged that a balance must be struck so that low-income Georgians are not unduly burdened.
“Does it have a disproportionately harmful effect on either middle or lower income earners?” he asked rhetorically. “The argument could be made, yes.”
The Republican-controlled state legislature is pushing to one day zero-out the state income tax.
While voters have already capped the rate at 6 percent thanks to a ballot referendum in 2014, this “could lead to financial problems down the road and will prevent future Georgians from making needed investments,” according to the study.
But many conservatives argue cutting taxes on top earners and businesses helps spur job growth.
Charles Bullock, a political science professor at the University of Georgia, said Georgia has long been a hotbed for the “FairTax” because of support from former U.S. Rep. John Linder, a Republican from Duluth, and libertarian radio host Neal Boortz.
So the idea of zeroing out income taxes in favor of higher sales, consumption and excise taxes “took hold more in Georgia than elsewhere,” Bullock said.
Moreover, in a politically conservative state like Georgia, sales taxes are more palatable because many voters believe they are less redistributive.
Income and property taxes typically support large government budgets, including services for the poor, while sales taxes are typically directed toward specific spending measures and projects, Bullock said.
“I think one of the reasons that voters are willing to pay (more in sales taxes) is that they have a sense that they know where the money is going,” he said.
Tim Evans, vice president of economic development at the Greater Hall Chamber of Commerce, said that’s the reason many business leaders support sales taxes.
“In Georgia, sales taxes are a major source of revenue funding for local schools and infrastructure spending that stays in the community,” he added. “For Georgia taxpayers, their income taxes don’t stay local; rather they are collected by the state or federal government for redistribution.”
But the study warns that the growing gap between rich and poor will widen if states moves to increase sales taxes, contributing to slower and more volatile tax revenue streams for local governments.
Ninety-five percent of inflation-adjusted per family income went to the top 1 percent of earners between 2009 and 2012, while the remaining 99 percent of Americans saw their income grow less than 1 percent, according to U.S. income tax data and census figures.
The richest 1 percent of earners accounted for 93 percent of the income gains in the first full year of the economic recovery.
According to the U.S. Census Bureau, about 56 percent of the most populous 818 counties in the nation have less income inequality than Hall County.
In Gainesville, about 28 percent of residents are living below the poverty level, compared with a statewide average of 17.4 percent. The median household income is slightly above $40,000; the statewide average is above $49,600.
Standard & Poor’s, the venerable credit rating agency, recently reported that income inequality slows economic growth, and that the problem is structural, rather than cyclical, in nature.
A similar finding by the International Monetary Fund was reported in 2012, with economists dismissing the “rising tide lifts all boats” narrative fueled by proponents of increasing sales taxes while cutting income taxes.
Personal income taxes account for better than 45 percent of the state budget, and eliminating this tax altogether would cost Georgia more than $10 billion.
With this in mind, Rep. Carl Rogers, R-Gainesville, said income taxes would have to be phased out over several years in order to slowly build up revenues from sales taxes to cover the losses.
Rogers said he is unsure if lawmakers will make any headway on this issue in 2015, but it’s an approach he said is necessary to compete with neighboring states Florida and Alabama, which have no income tax or lower rates than Georgia’s.
“I think anything like the ‘FairTax’ is what I call a common-sense approach,” he said.
Evans said income tax revenue is inherently unstable, another reason relying on sales taxes is a better option, particularly when it comes to supporting economic development projects.
“Income taxes are self-reported,” he added. “There are income tax deductions, loopholes, complete avoidance and a certain amount of cheating that is probably more common among all income levels than we’d like to think.”
But balancing budgets with higher sales taxes poses a risk to local government if the economy slips into another recession and consumers curtail spending.
Additionally, the possibility of voter backlash begins to come into play. That’s even more true given state lawmakers’ push to raise gas taxes to pay for transportation projects this year, plus local government and business leaders’ support for a new round of special purpose local option sales tax, or SPLOST VII, to pay for infrastructure and quality of life projects across Hall County.
Joe Randolph, owner of Randolph’s Barber Shop, said some African-Americans in Gainesville do not support sales tax initiatives like SPLOST VII because of this trend.
Besides, he said, “You don’t really see the benefits of SPLOST in this part of town.”
McClain is sponsoring a bill to raise the minimum wage for all workers in Georgia, something he said becomes even more necessary if Republican lawmakers insist on lowering income taxes and raising sales taxes.
“If you’re going to help the middle-class, you can’t take more from sales taxes,” he added.