Property Tax Relief & Income Tax Relief

In the wake of a flat tax revolution, rising property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. bills, and an ongoing divide between ever-higher and ever-lower income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. states, Georgia aims to stand out. Through HB 1116 and SB 476, policymakers are proposing both a property tax swap and a plan to eventually eliminate the state’s income tax. While these proposals are well-intentioned, Georgia lawmakers should make changes that truly benefit the state’s economy. Despite its unpopularity among taxpayers, the property tax is an efficient source of revenue, so any tax swap that substantially reduces reliance on property taxes would reduce the efficiency of the tax code. Also, while income tax rate reductions are helpful for a state’s economy, the plan for outright elimination would yield unintended consequences and cause more harm than good by taxing business inputs.

HB 1116’s Levy Limit, Not Tax Swap, Would Protect Taxpayers

Property tax burdens have grown in recent years due in part to rising property values and inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin, and Georgia lawmakers want to help. HB 1116 initially aimed for total property tax elimination for homesteads by 2032, but the current bill would create a 3 percent levy limit and allow localities to use portions of their local sales taxes to pay down their property taxes. Each participating county would annually reduce its homestead property tax levy by the amount of sales taxes collected that year for 10 years, with the option of renewing this policy when it expires.

While high tax bills are a problem, the property tax itself is a sound source of revenue. Because property is an immobile asset, the property tax has a smaller effect on economic decision-making than other types of taxes, especially income taxes. It’s also efficient—those paying the tax are generally the ones receiving the services it pays for—and transparent—while a taxpayer might not be able to tell you what she paid in sales taxes last year, most homeowners know their property tax bill.

But even an efficient and transparent tax needs guardrails. The proposed levy limit would restrict the growth of property tax revenues to 3 percent per year, adjusted for inflation. Unlike assessment limits, which can distort market decisions, levy limits are the most economically efficient and structurally sound way of curtailing the growth of property tax bills over time. They do so by limiting the total revenue brought in by property taxes, so even if housing values rise, property tax bills cannot fully rise alongside.

The bill also takes temporary sales taxes already dedicated to property tax relief and puts them under the authority of a Local Homestead Option Sales TaxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. (LHOST), effective for 10 years with the option of renewal. Notably, this only benefits homestead property taxes and does not reduce property taxes for businesses.

Any swapping of property tax burdens onto sales taxes is a less efficient way to raise revenue, and falls on a different mix of taxpayers. Localities with high property values do not always see high consumption, so some localities that newly instate an LHOST may see less of a property tax buy-down than expected. For example, a farming town may have high property taxes, but if it doesn’t have many stores or a shopping mall, it’s unlikely to raise much sales tax revenue. Furthermore, swapping property taxes for sales taxes would weaken the strong link that currently exists between local taxes paid and local benefits received. The value of one’s property corresponds, if imperfectly, with the market value of the benefits governments provide, like roads, police and fire protection, and schools, making the property tax the most suitable source of revenue to finance local government services.

SB 476 Takes Good Ideas Too Far

Separately, policymakers have proposed SB 476 as the first step toward income tax elimination. It would raise the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. Taxpayers who take the standard deduction cannot also itemize their deductions; it serves as an alternative. to $50,000 for single filers and $100,000 for married residents filing jointly, reportedly exempting two-thirds of individual taxpayers from the state income tax starting in 2027. It would also retroactively lower the 5.19 percent individual and corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rates to 4.99 percent as of January 1. This change would be financed by eliminating select corporate credits and exemptions.

The proposed rate reduction would improve Georgia’s rate compared to the rates of its neighbors, but the bill would narrow the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. and harm businesses—both through the specific credits and exemptions eliminated to pay for the first phase, and through the changes necessary to finance full elimination.

Georgia’s current individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source rate of 5.19 percent is just above the national median top rate of 5 percent, and the state is surrounded by low- and no-income-tax states. A 4.99 percent rate would bring the Peach State’s rate closer to North Carolina’s (3.99 percent), below Alabama’s (5 percent), and farther from South Carolina’s (6 percent).

The rate reduction would benefit the state, but the proposed high standard deduction is less sound. It would essentially turn the income tax into something closer to a high-earners tax, which could make further rate reductions or full elimination a harder sell. Taxpayers who pay no income taxes under this bill may not be eager to pay more in other taxes to bring down the tax burden for those with higher incomes. Narrowing a tax base to a third of its prior size opens the state up to volatility issues, too, as high earners tend to make more of their income from investment returns than those with lower incomes.

The elimination of corporate incentives is also more complicated than it appears. At least of the state’s $30 billion of corporate expenditures, according to the state’s expenditure report, are incentives that reward chosen business behavior (creating certain numbers of jobs or types of structures, donating to certain causes, etc.). These could—and probably should—be eliminated to finance rate reductions. However, not all corporate expenditures are true incentives. Most, in fact, are structural elements that ensure the tax functions as it should.

For example, Georgia allows businesses to deduct a certain amount of net operating losses in calculating their taxable income, to help ensure the corporate income tax applies to the business’s average profitability over time. Furthermore, are not a tax break for businesses; they are structurally important to ensure the retail sales tax falls on final personal consumption, not business inputs, as taxing business inputs causes tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action., where taxes are levied on top of taxes. If more business inputs are taxed, those costs would get passed on to consumers in the form of higher prices, employees in the form of lower wages, and shareholders in the form of lower returns on investment. Without those structural expenditures, corporate income taxes would become overly aggressive, driving business out of the state.

Currently, SB 476 targets some of these structural sales tax exemptions. It calls for an end to sales tax exemptions for specific machinery and equipment, high-tech companies, and data centers. While these may seem at first to favor certain industries, these “extra” exemptions simply serve to make the sales tax base the right size.

Other funding methods for income tax elimination also present problems.

For instance, the Senate report suggests sales tax base expansion more generally. Broadening the sales tax base to more categories of final personal consumption—including both goods and services—is good tax policy, but applying the sales tax to new categories of business inputs would have negative consequences. The sales and use tax, which brought in $9 billion in fiscal year 2024, would have to bring in around $25 billion to make up for the income tax. If Georgia included every category of personal consumption expenditures in its sales tax and applied the 4 percent rate, it would have brought in less than $24 billion in FY24. That number includes categories of final personal consumption the state expressly does not want to tax (groceries and fuel) or cannot legally tax (internet access), as well as things that are not really transactions (like imputed rent).

To bring in the right amount of money, the new sales tax base would have to include many business inputs like machinery, software and other digital services, HR and IT services, and the like, driving up the cost of doing business in the state. In turn, many businesses would raise prices, hire fewer Georgians, or simply leave the state so they wouldn’t have to pay as much to function.

Finally, the report assures legislators that “the combination of a large fiscal surplus, a growing economy, and a pro-growth policy environment” will “alleviate the need to consider the adoption” of certain politically unpopular tax increases. Economic growth certainly needs to be the goal, but growth alone will not fill a $16 billion gap—especially if the state simultaneously enacts taxes that hamper business activity.

What Should Georgia Do?

It’s for good reason that Georgia wants to eliminate the income tax and rein in property taxes. However, the changes Georgia would need to make to accomplish these goals would work against its overall competitiveness. Not every state can be an income-tax-free Texas or Florida. But every state can strive for a low-rate, well-structured tax system that encourages growth and innovation. Georgia lawmakers should embrace the efficiency of the property tax while providing the guardrail of a levy limit; focus on lowering rates through sales tax base broadening that applies to final personal consumption transactions only; and eliminate only those corporate expenditures that are truly preferential, rather than structural, in nature.