Last Friday, the Georgia General Assembly passed a budget for fiscal year 2010 that includes a major tax cut for the wealthy (an exclusion for long-term capital gains income) and a substantial tax increase for the middle-class (eliminating a state-funded property tax relief program). A new report from ITEP concludes that if this proposal was fully implemented in 2008, the poorest 95 percent of Georgia taxpayers would pay, on average, higher state taxes than they do now.
The proposed capital gains tax break would allow investors to exclude 50 percent of their long term capital gains income from the state income tax when fully implemented in 2012. If the capital gains tax cut had been fully implemented in tax year 2008, Georgia residents would have seen a total tax cut of about $340 million, and the very richest 1 percent would receive an incredible 77 percent of that. (For more on flaws of capital gains tax breaks at the state level, see ITEP's report A Capital Idea.)The property tax increase used to offset the costs would eliminate the Homeowner Tax Relief Grant (HTRG). Through the grant, the state of Georgia currently pays most property taxes on the first $8,000 of a Georgia homestead’s assessed value. Since Georgia homes are assessed for tax purposes at 40 percent of their market value, this is equivalent to exempting $20,000 of a home’s market value from property taxes.
While there are certainly flaws with any homestead exemption, there are plenty of alternatives for making property tax relief fairer. For example, a property tax circuit breaker can ensure that, for homeowners and renters earning below certain income levels, property taxes do not exceed a certain share of a family’s income. (For more on the benefits of property tax circuit breakers, see ITEP's policy brief.)The repeal of the Homeowner Tax Relief Grant should, in theory, have given lawmakers an important opportunity to rethink its approach to property tax relief. But the budget plan squanders most of the tax savings from HTRG repeal on a poorly-conceived long-term capital gains tax cut for a small number of the wealthiest Georgians. Governor Sonny Perdue should know that approving these changes would amount to a blatant shifting of state taxes from the rich to the middle-class.
Capital gains tax preferences are costly, inequitable, and ineffective. They deprive states of millions of dollars in needed funds, benefit almost exclusively the very wealthiest members of society, and fail to promote economic growth in the manner their proponents claim.
• Capital gains are the profits one realizes from the sale of an asset, such as stocks, bonds, investment or vacation real estate, art, or antiques.
• The two most common assets held by working Americans – their investments for retirement and their homes – generally are not treated as taxable capital gains when they are sold. Assets held in 401(k)s or Individual Retirement Accounts (IRAs) – the means by which most households own stocks and bonds – are considered "ordinary" income when they are sold and are therefore ineligible for capital gains tax breaks.
• In practice, very few low- and moderate-income Georgia taxpayers report income from capital gains. Federal data from 2006 indicate that, in Georgia, taxpayers with adjusted gross income (AGI) of less than $50,000 comprised 69 percent of all federal tax returns filed, but constituted just 8 percent of all returns with income from capital gains. Similarly, taxpayers in this income group held 26 percent of Georgia AGI in 2006, but received just 4 percent of reported capital gains income.
