Georgia Shows the Pitfalls of Modernizing a State Tax Code

Last year, the Georgia legislature created a brand-new special council on tax reform. One of the most prominent members was Roy Fickling, a Macon real estate man, appointed by House Speaker David Ralston. Not long after his appointment, Fickling stopped by Ralston’s office to see if there were any marching orders. To his surprise, there was only one: Forget about politics and give the state the tax code it needs. Ralston told Fickling and the rest of the council not to worry about what sorts of changes might attract a majority in the legislature.

 

The council, which included then-Governor Sonny Perdue, did exactly what Ralston recommended. Its members, mostly business leaders and academics, ignored politics.

They ultimately came forward with a sweeping proposal that would have eliminated sales tax exemptions on groceries and extended the sales tax to a whole raft of additional products and services, from shoe repair and dry cleaning to haircuts, home improvement, golf club memberships and online dating services. In exchange, there would have been a cut in personal income tax rates. Altogether, the plan was designed to be revenue-neutral.

 

The members spent six months working independently, traveling the state in pursuit of citizen and stakeholder input with no legislative involvement. It delivered its report to the legislature in January, just as Perdue was leaving office and fellow-Republican Nathan Deal was replacing him.

 

That was when Fickling got his second surprise. The legislature refused to act on a single one of the recommendations. Governor Deal didn’t lift a finger to help move them through. And the whole experience left some close observers wondering whether ignoring politics is the best way to get major tax changes enacted.

 

“You can’t take politics out of tax policy,” argues Sarah Beth Gehl, deputy director of the Georgia Budget and Policy Institute. “One of the hardest votes you can take is to move your state to a 21 ^st century revenue system. Part of the problem is that there are always going to be winners and losers.”

 

In this case, it was the losers who did the most to make their presence felt. The recommendations received criticism from seemingly all corners — advocates for low-income families, Southern Baptists, tea partiers. They latched onto particular pieces of the proposal they considered unfair and aired their grievances in the media. “We got it from everywhere,” says Christine Ries, an economist at Georgia Tech who served on the council. “Every deduction is a special interest, and everyone thinks, ‘well, mine is virtuous.'” Georgia State University economist David Sjoquist, a member of the panel, laments that “there was never a chance to talk about the logic behind the package as a whole.”

Tax reformers in other states who have tried similar efforts could have told the Georgia council just how hard its job would be. A proposal very similar to Georgia’s was voted down by popular referendum in Maine in 2010. Former Michigan Governor Jennifer Granholm succeeded in pushing through an expansion of the state sales tax to many services in 2007, but opposition to the move prompted the legislature and the governor to change course only a few weeks later by replacing the tax with an additional levy on businesses-which turned out to be a more politically palatable option. This year, Rhode Island Governor Lincoln Chafee has faced an onslaught of opposition to his ideas for broadening the sales tax base even though he would lower some income tax rates at the same time.

 

Georgia State economist Sjoquist reviewed the work of 19 state tax reform councils around the country that have put forth recommendations in the last decade. He noticed nearly identical recommendations in many cases, all focused on broadening bases while lowering rates. One of the reasons why such proposals are difficult to enact, Sjoquist says, is that states tend to turn their attention to them only when their revenues are dropping. That makes it harder to “buy off the losers” with offsetting tax cuts, which was part of the problem in Georgia this year.

 

One gamble the Georgia council took was modeling its approach on the BRAC process the federal government uses for closing defense bases that are no longer needed. Under the rules of BRAC, a commission submits a list of proposals to the president, and if he approves, sends it on to Congress. There it must be voted on as a package-no amendments. The legislation creating the tax reform council in Georgia had a similar provision. But there was one crucial difference. If Congress does nothing at all, the bases get closed. If the Georgia legislature chose to do nothing, which is what it did, the rules left the tax code just as it was. “The unfortunate issue for us,” says House Minority Leader Stacey Abrams, “is that we had the ability to undue our own process.”

 

Despite this year’s disappointing result, some Georgia tax reformers think the effort will still yield results. Bradford Dickson, an Atlanta accountant who served on the council, says that fundamental changes in the way the state collects revenue may be possible in the near future because of the groundwork that has been laid. “The majority of lawmakers want to make this happen, but I think it was a little too much too fast,” he says, noting that the state’s legislative session was only 40 days long.

 

Some are hopeful that Governor Deal will include tax reform as part of a special session that is planned this summer to enact redistricting, or that the council’s recommendations might be acted on next year. Others worry, however, that the legislature missed its shot because of the toxic politics that dominates the redistricting process and the election season that will be in full swing when the legislature convenes for a regular session in 2012.

 

Council member Fickling, for his part, is open about his disenchantment with the political process. “In the end, it kind of defeated the entire purpose,” he says. “I would rather see nothing done than bits and pieces.”