Georgia Becomes First State to Cap Income Taxes

The cap makes the state more competitive with its tax-friendlier neighbors, but states that have enacted similar restrictions on taxes encountered financial problems later.
by | November 4, 2014

Georgia has become the first state to put a ceiling on its income tax rate as a ballot measure that lawmakers say will put the state on a more level playing field with its tax-friendlier neighbors cruised to an easy victory.

With 85 percent of counties reporting, 75 percent of voters approved the ballot measure, capping Georgia’s income tax rate at 6 percent.

Proponents say the cap cements Georgia’s status as a low-tax state. “It increases our competitiveness by pointing out to businesses making expansion decisions that, while other states could increase their rates tomorrow, our rates are constitutionally capped,” Republican state Senate President Pro Tempore David Shafer, a key supporter of the cap, said earlier this year.

Indeed, the Peach State tends to be at a disadvantage when compared with its immediate neighbors. It shares a border with Florida, which doesn’t tax income at all; Alabama, which has a 5 percent tax rate; and Tennessee, which only applies its 6 percent tax rate to investment income. Its other neighbor, South Carolina, has a 7 percent top income tax rate.

But compared with the rest of the country, Georgia’s income tax rate ranks squarely in the middle of states. And to policy watchers, Georgia has removed one of the most valuable financial tools it has.

“The state legislature will no longer have the income tax as a practical option if voters in the future want more investment in infrastructure or smaller class sizes or if the state faces shortfalls in future recessions,” said Don Boyd, senior fellow at the Rockefeller Institute of Government in Albany, N.Y. “Research has shown that limits on individual taxes have little impact on overall tax levels. If other needs arise, the state or its local governments are likely to raise the sales tax, or property taxes, or other taxes.”

Other states have enacted caps or similar restrictions on taxes only to encounter problems later. In Illinois, the individual income tax and corporate income tax must maintain a certain ratio to each other, making policy changes extremely difficult because neither can be raised or lowered without the other. This summer, ratings agencies warned Illinois of a credit rating downgrade after the state failed to extend an income tax hike in its 2015 budget.

In the late 1970s, California passed Proposition 13, which responded to soaring property values by capping the property tax and requiring a two-thirds approval of any other tax increases. It made it extremely difficult for local governments to eeke more out of their revenue streams. By 2009, the state was so hamstrung in its taxing ability that it faced a $21 billion budget deficit.