May 11, 2009

Georgia: Perdue Vetoes Capital Gains Tax Cut

A big tax fairness gain in Georgia today: after thinking on it for a few weeks, Governor Sonny Perdue has decided to veto legislation that would have cut the state's income tax on capital gains. The proposed tax cut, which the legislature had approved at the same time as a bill ending state funding for a property tax credit for homeowners, would have done little or nothing for most middle- and low-income Georgians. Viewed in combination with the property tax legislation, moreover, the combined effect would have been a tax hike on middle-income folks and a tax cut at the top! ITEP's analysis has details.

Opponents of the capital gains cut argued that the cap gains cut was essentially being paid for by the repeal of the homeowner property tax credit. While this isn't technically true, it is essentially correct: the legislature made the politically-odd choice to repeal a popular homeowner tax break not because they wanted people throwing bricks thru their windows, but because they needed the money to balance the budget. And they needed more money because of their zeal for cutting cap gains taxes.

The "Think Progress" blog is already arguing that Perdue's decision constitutes a repudiation of supply-side policy. This is wishful thinking, or else just a rhetorical cheap shot. Perdue's veto message says pretty clearly (to my eyes) not that capital gains tax cuts don't work, but that they take more than one year to work:
Georgia is constitutionally required to maintain a balanced budget: for every dollar in decreased revenue, we must correspondingly cut expenditures. We cannot deficit spend as the federal government does, even if those deficits generate economic growth in the long term.
In other words, in a deficit environment, when the goal for the state has to be to make things balance in the current year, he's saying it's impossible to push a tax cut unless you can pay for it immediately. Cap gains tax cuts will still grow the economy, he's saying-- it's just that the growth will happen outside the single-year budgetary window. National anti-taxers don't need to get nervous-- Perdue is not rejecting supply-side principles. He's simply operating within a political framework that doesn't recognize that sometimes supply-side policies need a big canvas to work on in order to be effective. A reeaalllly big canvas.

Having said that, I'll take the outcome. The cap gains bill was a real threat to the income tax (and to the fairness of the tax system), and repealing the property tax break is hardly all bad. Of course, using the lost revenues to enact a new "circuit breaker" property tax break would be a great thing. But the important first step is to recognize that the existing property tax credit is a big, fat, untargeted, unaffordable thing, and the legislature has done that.

But it's not over-- the cap gains fight, after all, is NEVER really over. Secretary of State Karen Handel (who clearly has no interest at all in higher office) had this to say:
While I appreciate the Governor’s position that the tax cuts included in the bill would have made balancing our state budget even more difficult, I believe that the economic benefits to our state would have outweighed these concerns.
Now is the time for us to cut taxes in order to help grow jobs and ignite our economy.
Taken at face value, Handel is saying one of two things here: either (1) Perdue is wrong because the cap gains cuts actually would have grown revenue immediately, offsetting the revenue loss, or (2) silly budget deficit rules don't matter and we can ignore them. Neither position speak well for Handel's abilities to manage a budget if she ever decides she'd like to hold a higher office than she currently does

Another feather in the cap for the Georgia Budget and Policy Institute, which got editorial attenion statewide for its criticisms of the capital gains cut.