During the second last week of the session, the House began working through Senate bills in earnest. We spent a lot of time in committee, and voted on 25 pieces of legislation on the House floor.
HB 386, a package of tax code changes, was the most significant item we voted on. It proposes a number of cuts, as well as several increases. Among the tax cuts, the two largest are the phase out of the sales tax on energy used in manufacturing, and an elimination of the marriage penalty in the state income tax. The energy tax has seen increasing attention in the last couple of years, because we are one of the last states in the southeast still collecting it, which has been a serious disincentive for manufacturers looking at locating in Georgia. It may have a role in the significant rate at which we have lost industrial jobs in the last decade. The bill would end that tax in a four-year phase out, with the ultimate benefit to business being over $160 million per year. The other key provision of the bill, the removal of the marriage penalty, would phase in more quickly, and would amount to a roughly $150 million per year benefit to households.
Several other less significant cuts are included in the package. Agribusiness would receive a number of sales and use tax exemptions on production inputs. Regionally significant economic development projects would become eligible for a sales and use tax exemption on construction materials. This would be used as a tool for the state to lure major projects like Kia or the more recent Caterpillar announcement. Another cut would be a reduction of the sales and use tax on aviation fuel, meant to bring Georgia's tax in line with surrounding states, and to maintain Hartsfield-Jackson as a major hub airport. The next change would be the elimination of the annual ad-valorem tag tax on vehicles. Starting on March 1 of 2013, any vehicle purchased (new or used) would no longer see the annual ad-valorem notice, which some have referred to as the "birthday tax." Owners of vehicles purchased from the beginning of this year until that date will have the ability to opt into the new system created by this bill if they want, or they can remain under the old ad-valorem system. Vehicles purchased prior to this year will remain under the old system. The final tax cut in the bill would be a two-year restoration of the popular sales and use tax holidays for energy efficient appliances and for school supplies at the beginning of the school year.
Inevitably, the cuts offered in the bill must come at some price. The economy has not recovered enough, and thus tax revenues have not grown sufficiently to support the measure as a stand-alone cut. Once fully phased in, the bill would deliver about a $450 million dollar tax cut per year, offset by roughly $330 million in increases - so a net cut of around $120 million each year. Just as with the cuts, the increases come from a number of sources. First is the flip side of the ad-valorem coin. Starting March 1 of 2013, all new and used vehicle purchases (not just commercial, but private as well) will see a 7 percent up-front fee, though that will be considered a one-time title charge, rather than a sales tax. Transfers from a parent or grandparent to their child or grandchild will see a much lower title fee. These changes are meant to broaden the base of this tax system, which allows the elimination of the ad-valorem tax. They are also intended to deal with an under-the-table-sales problem. Black market dealers are gaming the system by bringing vehicles in from other states and selling them more or less directly off the truck, thus avoiding the sales tax.
A second change will be a lowered cap on the conservation easement credit, dropping it from $1 million to $500,000. The program would also see tighter eligibility controls to counter problems in which it has been abused. The third increase is not an immediate source of revenue, but rather a down the road one. Current law would phase out state income taxes on all retirement income by 2016. Instead, the present situation, in which the first $65,000 per individual ($130,000 per couple) is exempt from state income tax, would become permanent. Another place the bill would raise revenue is to require that sales tax be collected by internet retailers who have any kind of physical presence in the state. Nine other states have done this, to include several in our region. This is somewhat of a fairness issue, since in-state retailers who already collect that tax operate at a competitive disadvantage. Also, if we ever hope to move toward consumption based taxation, it is appropriate to broaden the base. An interesting footnote: under the existing law, sales tax is always applicable, whether the retailer collects it or not. Technically, we are supposed to report our purchases and pay the tax, even though there is no enforcement mechanism.
There is one other way the bill would increase revenue, affecting an industry of greater interest to our area. Movie makers in this state currently have a sales and use tax exemption on purchases made in Georgia. The bill would eliminate this exemption. When the bill was first announced, I soon received several emails from folks who were concerned that the legislature was about to destroy the movie business that has built up in our area in recent years. That will not be the case, because the sales tax exemption is one of two tax incentives currently in place for this business, and it is much the less important of the two. The sales tax exemption has been around for about ten years, and didn't do much to attract film makers to the state. In 2007, the General Assembly passed a 30 percent income tax credit program, and that was the incentive that brought the big surge in movie business to Georgia. HB 386 does not touch that second incentive. Firms in the film industry informed the authors of the bill that loss of the sales tax exemption was no great concern.
All this being said, my decision about the bill was not an easy one. I think the manufacturing energy tax and marriage penalty eliminations are very good things to do, but am not as pleased about several of the other changes the bill would bring. I had hoped the legislation might seek some structural reforms like reductions of personal or corporate income tax rates, simplification of the tax code or more of a shift away from taxing incomes to taxing of consumption. After a good deal of review and consideration, I concluded the measure was nonetheless an overall benefit to the state, and so I supported the bill. On the House floor, it required about two hours to present, and then passed by a surprisingly bipartisan 155 to 9.
On Thursday, Molly and Luke Thornton of east Newton came to page for a lengthy floor session in the House. They did a great job, and I appreciate their help!
Doug Holt (R-Social Circle) is the District 112 representative. He can be contacted by phone at (404) 656-0152, and email at Doug@DougHolt.org.