Analysts generally say that measures the Georgia legislature passed to curb state and local taxes don't raise significant credit concerns.
Late last week, the legislature passed a cut to state personal income taxes and a limit to local property taxes. The bills have been sent to Republican Gov. Brian Kemp for his consideration.
Observers have said Kemp is likely to sign the bills.
Democratic Georgia Rep. Scott Holcomb sent a letter to Kemp Monday saying the property tax bill was contrary to the state constitution. "All bills for raising revenue, or appropriating money, shall originate in the House of Representatives," the constitution says, he wrote. He said since the bill raises revenues but started in the Senate, it is unconstitutional.
The governor's spokesperson said Kemp and his staff would thoroughly review all bills before the governor decided which bills to sign.
The legislature passed a personal income tax rate cut, House Bill 463, of 20 basis points from 5.19% to 4.99% despite the state failing to meet the revenue conditions in a previously passed law (which would have only cut the rate by 10 basis points). If it becomes law, the new rate would be for calendar 2026. The new bill, if the governor signs it into law as expected, would mandate annual reductions of 12.5 basis points beginning in 2027 until the rate reaches 3.99%. The bill has provisions to delay the cuts under certain fiscal conditions.
The national median top individual state income tax rate is 5%, according to the Washington, D.C.-based Tax Foundation.
The bill would raise the standard deduction from $24,000 to $30,000 for joint filers this year, increasing by $750 every year starting in 2037 until it reaches $36,000. For individuals, it would go from $12,000 to $15,000 and then increase it by $375 annually until it reaches $18,000. The increases are supposed to happen each year only if the governor's state revenue estimates for the forthcoming fiscal year are at least 3% above those for the current fiscal year.
The deduction for each dependent would increase to $5,000 for 2026 from $4,000, with further increases planned until it reached $6,000 in 2027.
"The tax cuts in an election year are not a surprise especially with the governor term limited," said Joseph Krist, publisher of Muni Credit News. "The issue with the tax cuts is whether the legislature has the will to adjust spending. My guess is they are counting on savings from among other things Medicaid to finance the cuts."
"States which never wanted to expand Medicaid under the Affordable Care Act are using the specter of those proposed Federal cuts to reduce what they cover," Krist said. "Georgia has been one of the most aggressive states in terms of things like work and reporting requirements to reduce costs through reduced enrollment.
"That's been done in other red states and it is not proving out positively," Krist said.
"Reducing income taxes at the state level 20 basis points is fine and the state should be able to handle that easily," said Cumberland Advisors Executive Vice President and Chief Investment Officer John Mousseau. "But why circumvent a previously passed law which is supposed to be fiscally responsible? Sends a poor message from the legislature, in our opinion.
"Going another 1% down in the personal income tax rate from 4.99% to 3.99% in 12.5 percent increments (8 years) seems like salami tactics for a state that has a surplus as well as one of the lowest debt levels relative to revenue," Mousseau said. "Do it in three or four years. That sends a more meaningful message…. Clearly states must be aware of what contiguous states are doing as well."
"The increases in the state standard deduction we think are always a good thing … that reduces taxable income automatically and benefits those who don't itemize, which is most taxpayers (understanding that it must meet the state revenue increase threshold)," Mousseau said.
"At the margin, it makes the state income taxes somewhat less regressive and more predictable," he said.
"While Fitch [Ratings] expects economic growth to offset some revenues loss as the recently adopted income tax cuts and possible future reductions are implemented, Georgia may need to take action to maintain structural balance," said Fitch Director Tammy Gamerman. Fitch rates Georgia AAA.
Daniel Kanso, Leah Chan and Ashley Young
The legislature also approved Senate Bill 33 on property taxes, which limits the growth of property tax assessments for properties used as homes to the rate of inflation. Prior to the bills, some localities had adopted this as a policy and others had opted out of it. If the bill is signed into law, all counties, cities, and school districts with property taxes would have to follow it.
If actual property values go up faster than inflation, the taxable value can only go up by inflation each year. If subsequently the property value rates of increase are below inflation or if property values actually go down, over time the taxable value might catch up with the actual value.
Clint Mueller, deputy director of the Association of County Commissioners of Georgia, said his association supported the bill. With some parts of the state seeing rapid increases in property values and assessors often allowing several years between assessments, residents have frequently been angered by substantial jumps in property tax bills. Residents have directed their anger to county commissioners, though they had little or nothing to do with the bills, Mueller said.
Mueller said the association is aware that
The property tax bill also would allow localities to have a 1% sales tax, with the revenue used exclusively for homestead property tax relief.
The
Any increases would have to be approved by voters in referendums.
"Earlier versions of the House bill would have significantly reduced or eliminated property taxes, creating extreme budget problems for some local governments," said Walter Goldsmith, chief executive officer of First Tryon Advisors. "From the perspectives of local governments, investors and rating agencies, Senate Bill 33 is a much better outcome than the earlier, more aggressive overhaul versions.
"That said, the legislation will limit flexibility for local government budgets and we'll likely continue to see budget challenges going forward as they adapt to a more restricted revenue structure," Goldsmith said.
Mousseau said, "Limiting property tax increases is a good goal but clearly may run into issues with municipalities having higher fuel costs for example. To the extent they are replacing this with sales taxes, [the] sales taxes are regressive at the margin. At some point that may become a campaign issue."
Michael Rinaldi, senior director at Fitch, said, "From a rating perspective, an important aspect of the bill is that SB 33 would not impose a hard cap on the tax rate or levy of Georgia counties or cities, thereby preserving local control over property tax revenues, which are typically the largest single source of revenue for their operating budgets."
Despite the legislature during the recently-completed session considering many bills to protect taxpayers from the impact of data centers on infrastructure costs, none of the relevant bills passed. There have been a growing number of large data centers in and around Atlanta.
"I'm surprised that no bills passed protecting taxpayers from [the] impact of data center costs," Mousseau said. "That will bring on the NIMBY protesting over both electricity costs as well as water costs for cooling."
The failure to pass a bill "will increase pressure on incumbent Public Service Commission members in this fall's Georgia election," Krist said. "We already saw the power of the issue of electric rates in the election this past November that turned out two incumbents on the Georgia PSC."
