Tax Reform Initiatives: The Impact According to Research

1. Tax Reform Initiatives: The Impact According to Research Ken Heaghney Columbus, Georgia December 11, 2007

2. Outline of Tax Reform Strategy • Eliminate all property taxes • Broaden the sales tax • Remove current sales tax exemptions • Does this include business exemptions? • Add services to the sales tax base • How aggressive in taxing services? • Replace lost property tax revenues with grants • Provide a tax credit for low income household • ESPLOST: half for operations

3. Agenda • Background data on property tax and sales tax revenues • Some preliminary data on winners and losers • Estimating the net fiscal impact

4. Georgia Local Government General Revenues = $19.4 Billion Source: U.S. Bureau of the Census

5. Total Property Tax Collections = $9.6 Billion $Millions

6. Net of Offsets, $9.0 Billion in Property Tax Revenue Must Be Replaced Offsets Assessor Costs Property Tax Deduction HTRG Net = $9.0 Billion Total Property Taxes

7. State and Local Sales Tax Revenues - 2006 - ($Billions)

8. Agenda • Background data on property tax and sales tax revenues • Some preliminary data on winners and losers • Estimating the net fiscal impact

9. Who Pays the Property Tax? Revenue by Property Class ($Millions)

10. Summary of Current Sales Tax Exemptions ($Millions) Total = $10.9 Billion

11. How Does Broadening the Base Change the Sales Tax Burden? Low High Source: Fiscal Research Center

12. Key Issue – Property Taxes are Deductible • In 2006, itemized deductions related to property tax reduced Georgia taxpayers income tax liability: • Federal liability reduced by $930 million • State liability reduced by $105 million

13. Agenda • Background data on property tax and sales tax revenues • Some preliminary data on winners and losers • Estimating the net fiscal impact

14. Issues in Broadening the Sales Tax Base • Measurement – We lack good data to precisely measure the expected revenue from a broader base. • Several methods used to narrow the potential range • Policy - How aggressively do we want to tax services and eliminate exemptions? Rent? Health care? Business? • Scenarios created to identify revenue impacts from different strategies • Compliance and Avoidance – It may be difficult to collect from some service providers and some consumers may increase cross border & internet shopping. • Estimates should be considered upper bound impacts

15. Using State GDP Data to Estimate the Sales Tax Base (Laffer Method) Total State & Local Sales Tax Revenue $22.2 billion This method shows a net increase in tax revenues

16. Alternative Estimate Using Laffer’s Methodology Total State & Local Sales Tax Revenue $16.1 billion This method shows a net decrease in tax revenues; estimate includes about $5.2 billion on new homes & health care services

17. Added Revenue from Eliminating Current Exemptions on Goods (in $millions) Alternative 1 Alternative 2 Alternative 3 Alternative 4 Source: Fiscal Research Center

18. Added Revenue from Taxing Additional Services (in millions) Alternative 1 Alternative 2 Alternative 3 Source: Fiscal Research Center

19. Summary – Added Revenue from Broadening the Sales Tax Base (in millions) Benchmark: exempts most B2B sales, tax household purchases of services except health care and education. Aggressive: add services provided to businesses, 30% not taxed. Source: Fiscal Research Center

20. Summary of Alternative Estimates ($ billions) Total Sales Tax Revenue Total Required to Breakeven Estimates indicate that a very aggressive approach to eliminating exemptions and taxing services is required to fully replace all property tax revenue