Key Implications of Georgia’s New Flat Tax Rate

In April 2022, Governor Kemp signed House Bill 1437 (HB1437) into law, replacing Georgia’s current progressive income tax with a flat-rate income tax.

Effective January 1, 2024, the flat tax in Georgia will start at 5.49% and decrease by 0.1% over five years until it reaches 4.99% in 2029. The bill also cuts most exemptions — but significantly increases personal exemption amounts. Under HB1437, single filers and heads of households can claim a deduction of $12,000, while those married partners filing jointly will see their exemptions rise to $18,500. (That’s up from $2,700 for single filers and $7,400 for married couples filing jointly in 2023.)

So, how will you fare with Georgia’s new flat tax rate? Let’s dive deeper into this new tax law and its implications.

What is a Flat Tax Rate?

A flat income tax rate enables all taxpayers to pay the same tax percentage, regardless of their income. For example, assuming a flat tax rate of 5%, a taxpayer earning $150,000 per year will pay $7,500 in taxes, while a taxpayer earning $550,000 per year will pay $27,500.

In contrast, a progressive tax rate is one where your tax burden increases with your income. This is the kind of tax most Americans are familiar with: as your income increases, you are placed in progressively higher tax brackets and taxed at those respective rates. Most states’ progressive tax rates start around 2%-3% and are capped at around 6%-7%, with higher-income-tax states such as New York, California, Hawaii, and New Jersey capping theirs at about 10%-13%. Federal income taxes, too, utilize a progressive tax rate.

Understanding Georgia’s Change to a Flat Tax Rate

Fortunately for its citizens, Georgia has maintained one of the lowest overall tax burdens of any state. Though Georgia is in the top 15% of all states by total GDP, it is also in the top 25% for the lowest tax burden on its taxpayers. Only Florida shares similar stats.

But how will the flat tax rate affect Georgia’s favorable tax system? As with most nuanced scenarios, the answer is, “It depends.”

One of the goals of HB1437 is to center the state in a prime position from a tax competitiveness perspective. Two of Georgia’s direct neighbors, Florida and Tennessee, have no income tax whatsoever, while the other three neighboring states—Alabama and the Carolinas—have lower income tax rates. Many consider North Carolina Georgia’s biggest competitor for business, and its current tax rate is significantly lower than Georgia’s.

For a company making a headquarters selection decision, a flat tax rate may augment Georgia’s attractiveness, given the reduced income tax for executives and employees on top of the already favorable tax climate. The change may also attract remote workers who are looking to relocate from a higher-income-tax state to one with a lower rate.

Yet, if HB1437 stays on schedule, it is expected to decrease Georgia’s tax revenue by $1B. Although there are some protections in the legislation to prevent the tax rate from going into effect if state revenue collections don’t meet a certain threshold, if fully enacted, the tax cut in one area (i.e., tax on individual income) may prompt tax hikes in another (i.e., sales tax, property tax, or corporate income tax). The cut could also lead to reduced health care and public education quality: with nearly 75 percent of Georgia’s 2023 fiscal year budget spending going toward public education and health care, a significant revenue decrease can strain these programs.

Switching to a flat rate also aims to make taxes more “fair” on taxpayers. After all, everyone will pay one tax rate, regardless of income. However, according to a study by the Institute on Taxation and Economic Policy on the effect of Illinois’ flat tax rate, taxpayers earning under $250,000 were taxed on a greater percentage of their income than they would have been under a progressive tax rate policy. In addition, they also carried more of the overall tax burden, as they were responsible for paying $27 billion more in individual income taxes than the top 3% over the 20-year study period.

Unfortunately, the same study also found that minorities fared worse. Black and Hispanic taxpayers with taxable incomes less than $250,000 pay $4 billion more in taxes under a flat tax than they would have under a progressive tax. This may be a significant hurdle for the new Georgia flat tax since its most celebrated city, Atlanta, has an unfortunate history of ranking dead last nationally in income equality and upward mobility.

How Georgia’s Flat Tax Rate Affects You

Despite its acclaim and critiques, a flat tax rate presents unique opportunities for taxpayers.

From a planning perspective, the change will allow for greater tax liability management, providing more accurate and effective planning strategies. Furthermore, as more Georgians realize more after-tax savings, they can reinvest that income to help compound their nest egg over time.

The change will also hedge against inflation, as tax rate increases are usually common under an inflationary environment.

Overall, eliminating the unpredictability of a state tax liability will allow taxpayers to set and realize more goals and even adjust the timetable of those goals, potentially achieving them earlier.

A financial planner with the knowledge and expertise to help you with tax planning can make all the difference in optimizing these new statewide changes. At Felton & Peel, we look forward to helping you grow your wealth in a way that works for you.

Malik S. Lee, CFP®, CAP®, APMA®
Malik Lee is the Managing Principal of Felton & Peel Wealth Management. A CERTIFIED FINANCIAL PLANNER™ with more than 15 years of financial services experience, he is a Guest Lecturer at Morehouse College, serves on the CFP Board Council of Examinations, and is a Board Member for the FPA of GA.
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