Georgia voters overwhelmingly passed a cap on their income taxes in the Nov. 4 election, but analysts said it reduces the state's ability to respond to economic downturns. The amendment was placed on the ballot by the Georgia Legislature.

BRADENTON, Fla. — Georgia became the first state in the nation to constitutionally cap income tax rates on Nov. 4, but analysts reacting to the voter-approved constitutional amendment said it could hamstring the gilt-edged state.

The ballot measure, banning the General Assembly from increasing the existing tax rate, overwhelmingly passed with 74% of the votes. Experts said that shows how difficult it could be to change or remove such a provision.

While state officials said that Georgia is more attractive competitively with the cap — which limits income tax rates to 6%, the highest rate now — analysts said it also reduces the state's financial flexibility.

While the materiality of the amendment's passage is unlikely to be significant enough to affect Georgia's triple-A ratings, "any constitutional limitations on revenue raising flexibility are, broadly speaking, credit negative," wrote Wells Fargo chief municipal analyst Patrick Early on Nov. 5.

The individual income tax is Georgia's largest revenue source, and accounts for 47% or $9.5 billion of the state's $19.7 billion fiscal 2015 general fund budget, according to Moody's Investors Service analyst Kimberly Lyons.

"A significant strength of state management lies in its broad powers and resources to manage its finances in the face of volatility," Lyons said. "Georgia's constitutional cap has stripped the state of that option with respect to its personal income tax."

Georgia has a long history of "proactively and conservatively" managing through economic cycles by cutting spending when revenues experienced steep declines, she said.

"By placing a constitutional cap on its largest source of revenue, the state now has one less tool to offset revenue declines, although we would expect them to continue the past practice of quickly and soundly addressing revenue declines," said Lyons.

According to Moody's, Georgia experienced large year-over-year tax revenue declines in fiscal 2009 and 2010 as individual income tax revenues decreased by 11% and 10%, respectively.

Over the last five years, the state saw 3% growth in income tax revenues to reach pre-recession levels.

"While we do not view tax policy changes as negative, we have seen recent examples of tax cuts resulting in lower-than-expected revenue performance, which can be a credit challenge," Lyons said.

As an example, North Carolina reduced its income tax rate from a tiered 6%, 7%, and 7.5% to a flat tax rate of 5.8%. The state experienced a year-over-year decline of 6.2% in those revenues in fiscal 2014. Kansas experienced a year-over-year decline of 32% in fiscal 2014 after cutting income tax rates.

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