The Senate Finance Committee revived a proposal yesterday that died in the House on Crossover Day -- a proposal that eliminates the refundable portion of the Low Income Tax Credit. The Senate could vote on the measure (House Bill 1198) on Wednesday or in the final legislative days next week.
Currently, taxpayers with income below $20,000 are eligible for a tax credit ranging from $5 to $26 for individuals, with additional benefits for the elderly and families with children. If the tax credit exceeds a taxpayer's income tax liability, he or she receives the remaining credit as a refund.
More than one million Georgia taxpayers claimed the Low Income Tax Credit in 2007, receiving $29 million in credits. If legislators eliminate the refundable portion of the credit, they will cut the Low Income Tax Credit by two-thirds, lowering the total credits to low-income Georgians by $21.8 million, according to the fiscal note to the bill.
At the same time, legislators have passed about a half a billion dollars in new tax breaks for corporations and the state's wealthiest individuals. HB 1023 cuts the capital gains tax in half and eliminates the corporate net worth tax ($380 million annually when fully implemented). HB 1055 eliminates the income tax on retirement income for the state's wealthiest seniors ($150 million when fully implemented). These bills await the governor's signature or veto.
Why is the Credit Refundable?
The refundable portion of the Low Income Tax Credit (the portion that exceeds income tax liability) is indended to offset some of the sales tax liability faced by low-income Georgians.
Low-income taxpayers do not have a large income tax liability. Instead, they pay substantial sales taxes because they consume a greater portion of their income than higher income residents do.
Georgians earning less than $16,000 pay 7.8 percent of their income on average in state and local sales and excise taxes; however, Georgians earning $62,000 pay 4.4 percent and those earning over $433,000 pay 0.9 percent on average. Click here for a chart on tax liability by the Institute on Taxation & Economic Policy.
In its current refundable form, the Low Income Credit offsets a small fraction of sales tax liability for low-income taxpayers, making an overwhelmingly regressive tax somewhat less so. Since relief cannot be targeted specifically to low-income taxpayers through the sales tax, it must be done through the income tax.
Are Other Tax Credits Refundable?
The Low Income Tax Credit is not the only refundable credit -- it just happens to be the only one targeted to the very lowest-income taxpayers.
Corporations doing business in Georgia can claim certain tax credits even if they have zero corporate income tax liability. These include the film tax credit, the jobs tax credit, and the headquarters tax credit. A corporation with tax credits in excess of its income tax liability is able to receive the remaining credits by taking the credits against employee payroll withholding.
Here's how it works: Employees have income withheld from their paychecks for state income taxes. That money typically flows to the state. However, if the company has tax credits and no income tax liability to use the credits against, the state allows the corporation to keep the employees' withholding payments in the amount equal to the excess tax credits.
Corporate tax credits taken against payroll withholding (the essentially refundable portion) cost $20.9 million in 2007, nearly matching the cost of the Low Income Tax Credit refunds.
"If lawmakers pursue HB 1198 because they do not believe in refundability for more than one million of Georgia's lowest-income taxpayers, then it follows that they will also need to enact legislation to correct the refundable nature of certain corporate tax credits," said Sarah Beth Gehl, deputy director of the Georgia Budget & Policy Institute.
There is no doubt about the fact that Georgia desperately needs more revenues. However, there are many logical and fair options for seeking revenues, without focusing solely on those taxpayers who have the least ability to afford a tax increase now or after the recession. "Lawmakers should seek either broad-based revenue measures or those targeted at taxpayers with the greatest ability to afford it," said Gehl. Click here for a $450 million option.
Download the Georgia Budget & Policy Institute's analysis of the proposal (which was originally in HB 1219), including a more sensible alternative, here. The Institute on Taxation and Economic Policy has an analysis of the bill as well.
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