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1 Gerald Prante, An Economic Analysis of Georgia's Tax Cut Proposals 1 (2008)

handle is hein.taxfoundation/ffbcbxz0001 and id is 1 raw text is: FOUNDATION An Economic Analysis of Georgia's Tax Cut Proposals Fiscal Fact No. 121 by Gerald Prante March 28, 2008 The Georgia legislature is currently facing the question of what taxes should be cut, if any. Arguments have been put forth in favor of cutting income taxes, the personal property tax on cars, and even cutting income taxes for senior citizens only. Each side argues that its tax cut would be best for Georgia's economy going forward. Also on the table is a plan to enact a ceiling on spending growth in the Peach State. In this Fiscal Fact, we briefly analyze the two proposals favored by the House and Senate. Car Tax Cuts vs. Income Tax Cuts Although America's rapidly aging population justifies paying an increasing amount of attention to the economic status of the elderly, it should be noted that cutting taxes exclusively for senior citizens has very little justification from the perspective of sound tax policy. Therefore, we do not address this issue. The two major proposals are those in both houses of the legislature. The Senate wants a cut in the state's income tax by 10 percent in five annual 2-percent increments, so that five years from now, the current 6.0 percent rate would fall to 5.4 percent, and all the lower rates would fall commensurately. Meanwhile, the House wants to cut the state's car tax over that same period. Which is better tax policy? First, any extra tax on an arbitrarily selected product like automobiles needs to be justified. Typically, proponents of an extra tax will argue that the product imposes costs on society, a bad side effect that economists call a negative externality, and that government needs money to correct it. However, a specific tax on a product can also function as a sort of user fee that is linked to some government service. With automobiles, the link is transportation spending, and it's true that taxing cars and trucks and gasoline is a reasonable way to fund road building and maintenance. This is the so-called benefit principle of taxation. The people who get the benefit of good roads pay for them through the taxation of gasoline and vehicles.