Exempt items get focus in tax talks

Special
Richardson (right)

ATLANTA - Even those who aren't fans of House Speaker Glenn Richardson's plans to overhaul the state's tax structures concede that he's right on one count: There are too many exemptions to the state sales tax and most should be eliminated.

The list of several dozen exemptions sprawls over 9,000 words in the state tax code. Items ranging from sugar bought by some beekeepers to crab bait is given a free pass.

Mr. Richardson, R-Hiram, wants to repeal a good deal of the exemptions to bankroll his plan to do away with property taxes and, perhaps, reform the state income tax.

But even he admits there will need to be some exceptions to the law, and how many of those exemptions are preserved could decide just how far the reform goes.

The exemptions cost the state billions of dollars each year, according to a report prepared last year by the Fiscal Research Center at Georgia State University's Andrew Young School of Policy Studies.

Georgia could have taken in an additional $9.8 billion in 2004, the year the study focused on, the report said. That's nearly twice the $5.2 billion that the state made from the sales tax in the fiscal year that ended June 30, 2005.

Mr. Richardson's plan, which he said in a recent interview is still taking shape, would do away with many of them.

To soothe the pain of one of the exemptions likely to come to an end - for food - he said the state would create a refundable tax credit equal to estimates of how much the tax on groceries would cost a middle-income family.

As it's written, Mr. Richardson said, a visitor driving through Georgia can stop at a store, buy a Twinkie and not pay sales tax on it.

"That's ridiculous," he said.

The proposal also envisions extending the sales tax to services, something Mr. Richardson and others say is essential to dealing with the changing economy.

Mr. Richardson made it clear that he doesn't think every single exemption to the tax code should be dumped. Some, he said, just make sense or should be preserved.

The raw goods used for manufacturing and agriculture, for example, should continue to enjoy shelter from the sales tax, as should government transactions.

"It kind of makes no sense (to tax government purchases)," he said. "We're trading money."

The need to do away with some exemptions while keeping others gets no argument from Alan Essig, the executive director of the Georgia Budget and Policy Institute, a progressive, nonpartisan think tank based in Atlanta.

"Some exemptions make economic sense to have," he said. "Some exemptions make policy sense to have. ... We just need to get rid of the exemptions that don't make economic or policy sense."

Mr. Essig pointed out, however, that two of the exemptions likely to remain - those for government transactions and materials for manufacturing - make up a large chunk of the money lost to tax exemptions.

Governments saved $1.9 billion through their sales tax exemptions in 2004, according to the Georgia State study. The exemption on manufacturing materials amounted to almost $2.8 billion.

And if the state creates a tax on services, there likely will need to be exemptions for some of those also.

MR. ESSIG CAUTIONS against moving too quickly on tax reform.

"The problem is, we're actually getting ahead of ourselves," he said.

The state needs to first start generating a regular report on how much it gets from which taxes and how much it loses from each of the exemptions, he said.

"We don't even have the right information to be talking about this stuff yet," he said.

He also questions Mr. Richardson's ultimate goal of getting rid of the current way the governments bring in money, particularly by abolishing virtually all local property taxes.

"Do we need to blow up the tax system or reform the tax system?" he asked.

For his part, Mr. Richardson says switching to a sales tax, which affects every Georgian, is fairer than relying on a tax paid only by those who own property.

"Our plan is not to raise more money, but to raise about the same thing, but to have the largest number of people paying the smallest rate possible," he said.

The need for some exemptions seems to have taken the steam out of an idea to tax all services and sales, which could allow the state to create a flat income tax of 4 percent.

"To that extent, it may just be that we leave the income tax alone," Mr. Richardson said, though he didn't rule out returning to the issue in the future.

Mr. Essig gives Mr. Richardson credit for starting the debate, but he encourages a deliberate pace for tax reform.

"Whatever changes we make," he said, "it's going to be very difficult to go back."

Reach Brandon Larrabee at (678) 977-3709 or brandon.larrabee@morris.com.