Georgia’s gubernatorial candidates are touting competing tax plans which they claim will stimulate the state's economy and help businesses create and maintain jobs. Neither plan is likely to do that, but both would deprive the state of revenue that is sorely needed to address the state’s short- and long-term budget shortfalls.
Democrat Offers Capital Gains Tax Break
Roy Barnes, the Democratic candidate, recently released his "Jobs Plan" to "revive Georgia’s economy." The main element of his plan to "stimulate business growth and reduce the burdens on Georgians" is a proposal to exempt capital gains income from taxation for two years for investors who reinvest their gains in Georgia-based companies. Barnes believes his plan will increase investments, incentivize companies to rehire, and lead to new job creation. He has also suggested that the plan will more than pay for itself.
Capital gains tax breaks are costly, inequitable, and ineffective and thus there are a lot of problems with Barnes' plan and his assertions that it will stimulate Georgia’s economy.
First, Georgia simply cannot afford to lose revenue when facing a projected budget shortfall of close to $2 billion next year. State officials estimate that taxes on capital gains income under the current laws will raise an estimated $433 million next fiscal year.
ITEP State Tax Policy Director Meg Wiehe was quoted in an Atlanta Journal Constitution story on Barnes’ plan, saying, "The idea of losing any sort of revenue source seems pretty nonsensical to me when we know the things that revenue pays for — like education, teachers’ jobs and public safety — are really important for stimulating the economy."
Second, and not surprisingly, the benefits of Barnes’ proposed capital gains break will go almost exclusively to the state’s wealthiest residents, not to the low-income households who are struggling the most to make ends meet.
Furthermore, the idea that reducing taxes on capital gains will lead to a more robust economy is not supported by the evidence. An array of experts agree there is little connection between lower capital gains taxes and higher economic growth, in either the short-run or the long-run. A 2002 Congressional Budget Office (CBO) study concluded that capital gains tax breaks "would provide little fiscal stimulus" in the short-run, since most of the benefits of such cuts would accrue to high-income households, households that are more likely to save than spend, when the very aim of such short-term stimulus is to boost consumption. As for the long-term economic effects, there is no correlation between investment and economic growth and the marginal tax rate on capital gains income.
The tide has actually been turning against this type of tax break. In just the past year, Rhode Island eliminated their preferential rates for capital gains income. And, of the eight states that currently offer some sort of significant capital gains tax break, two of them — Vermont and Wisconsin — have both recently acted to reduce their exclusions for capital gains income. It seems like Barnes has missed the boat entirely with his proposal.
Republican Offers Corporate Tax Break
Nathan Deal, the Republican candidate, is promoting his "Real Prosperity Plan" as the best means to maintain and grow jobs in Georgia. The core component of the plan is a cut in the corporate income tax rate from 6 percent to 4 percent. Deal thinks such a cut will make Georgia more competitive with its neighbors and help the state attract potential new businesses that will bring new jobs with them. As critics have pointed out, most local businesses will not even benefit from Deal’s plan because they are structured as S-corporations or limited liability companies and are not subject to the corporate income tax.
The corporate income tax is one of the fairest taxes a state can levy. Just as working families and individuals benefit from the services that state and local governments provide, so too do corporations. At a time when Georgia is facing yet another significant budget shortfall, losing revenue from a progressive tax such as the corporate income tax is a bad prescription for fixing the state’s ailing economy, especially when the evidence suggests cutting the corporate income tax will not have the positive impact on the economy that Deal claims to seek.
A recent report from the Center on Budget and Policy Priorities offers an excellent explanation for why proposals to cut corporate income taxes offer "false hope" and are "unlikely to have a positive impact on a state's rate of economic growth or the pace at which it generates private-sector jobs." CBPP notes that "cutting corporate tax rates may be politically appealing, but neither logic nor evidence suggests that doing so will stimulate significant economic growth. The fact that no state has enacted such cuts in the past two or three years suggests that many policymakers already doubt the proponents’ claims."
On a side note, Deal is also an avid supporter of the so-called Fair Tax, another indicator that he is no friend of sensible tax policy.