Third Time’s a Charm: Governor Bentley and Legislature Reach Budget/Tax Compromise
State & Local Tax Alert: Alabama Edition
Governor Robert Bentley called a second special session of the Alabama Legislature on Tuesday, September 9 at 5 p.m. to address the FY 2016 General Fund budget and associated revenue measures. After meeting for eight of the 12 allowable legislative days, the Legislature adjourned sine die last Wednesday, September 16 after passing a $1.76 billion General Fund budget. The enrolled budget, which the Governor signed late last week, includes approximately $166 million in new revenue generated through legislation passed during the special session. It provides level funding for Medicaid, the Department of Corrections, the judicial system, the Department of Mental Health, and the Department of Human Resources. Most other state agency budgets are cut by approximately 5.5 percent or more.
The second special session was necessary because the Governor and Legislature failed to reach an agreement on a General Fund budget during the regular session and the first special session. As our readers may recall, at the conclusion of the regular legislative session in June, the Governor vetoed the Legislature’s final General Fund budget, which cut funding by approximately $200 million. During that session, Governor Bentley proposed raising taxes by more than $500 million to cover the General Fund shortfall. The Governor called the first special session in August, in which he proposed approximately $300 million in new revenue. The Legislature ended that session without passing a budget.
Second Special Session
Governor Bentley’s “call” for the second special session included approximately $260 million in tax increases along with budgeting reforms to aid in solving the structural shortfall in the state’s ailing General Fund.
Specifically, the Governor’s “call” included three budget reform measures:
- Transfer future use tax revenues from the Education Trust Fund to the General Fund
- Un-earmark certain state taxes
- Amend the Education Trust Fund Rolling Reserve Act
Additionally, the “call” included four revenue increase measures:
- Amend the Business Privilege Tax
- Increase the Cigarette Excise Tax
- Eliminate the individual income tax deduction for Federal Insurance Contributions Act (FICA) and the corollary self-employment tax deduction
- “Any other revenue measures” that provide revenue for the General Fund or infrastructure
Ultimately, the Legislature ended the session with a General Fund budget that included approximately $166 million in new revenue generated through the following four primary sources: a use tax transfer from the Education Trust Fund, a cigarette tax increase, a nursing home bed tax increase, and a prescription drug provider tax increase. The use tax transfer was contingent upon legislation that amended the Rolling Reserve Act in a way that freed-up education dollars that would have otherwise been deposited in a “rainy day” fund. The other tax increases proposed by the Governor – an increase in the Business Privilege Tax and the elimination of the FICA deduction – failed to pass out of the House of Representatives.
One notable exception to the general 5.5 percent budget cut was the Alabama Department of Environmental Management (ADEM), whose budget was cut by 83 percent. The agency’s appropriation was cut by almost $1 million – from $1.2 million in FY 2015 to $280,000 in FY 2016. Additionally, language was added to the budget in the final hours of the session that prohibits ADEM from using money from the Underground and Aboveground Storage Tank Fund to shore up their budget. House and Senate leadership, however, agreed to work with ADEM and the regulated community to address this problem during the 2016 regular session.
Enacted Revenue Bills
H.B. 30, Act 2015-539 – Use Tax Transfer: Effective October 1, 2015, this legislation transfers $80 million (or 53 percent) of use tax receipts to the General Fund from the Education Trust Fund. Because it provides much-needed growth revenue to the state’s General Fund, this bill was considered by many to be the most important part of the budget package. The Governor stated last week that he will propose legislation next session to move the remainder of the use tax revenues to the General Fund.
H.B. 29, Act 2015-538 – Rolling Reserve Act Modifications: This legislation amends the Education Trust Fund Rolling Reserve Act to allow for increased spending capacity in the ETF Budget. The Rolling Reserve Act was passed in 2011 to stabilize education spending and prevent future proration in the ETF budget. The bill also creates the Education Trust Fund Advancement and Technology Fund, which will allow the Legislature to make one-time appropriations for technology in public schools during good economic years.
H.B. 3, Act 2015-535 – Cigarette Tax Increase: This legislation, which is effective October 1, 2015, increases the tax on cigarettes by 25 cents per pack and provides for its distribution to the General Fund for the purpose of funding Medicaid. The bill also decreases the tobacco tax stamp discount currently enjoyed by wholesalers or jobbers, and alters the distribution of tax on consumable vapor products. Finally, the legislation requires wholesalers of tobacco products to stamp cigarettes and collect tobacco tax when those tobacco products are sold to an Indian reservation tobacco vendor. However, it also provides for a refund of tobacco taxes paid by tribal members on purchases of cigarettes and other tobacco products purchased within the boundaries of a federally recognized Indian reservation. This legislation is estimated to generate $70 million in new revenue for the General Fund in FY 2016.
H.B. 8, Act 2015-537 – Prescription Tax Increase: Effective September 1, 2015, this legislation provides for a supplemental privilege tax of 15 cents for each prescription filled or refilled for a citizen of Alabama to be collected during fiscal years 2016 and 2017. Under existing law, there is already a privilege tax upon providers of pharmaceutical services. The bill provides, however, that the federal CMS must approve a pharmacy dispensing fee increase in order for this temporary tax increase to go into effect. This legislation is estimated to generate $8 million in new revenue for the General Fund in FY 2016.
H.B. 12, Act 2015-536 – Nursing Home Bed Tax Increase: This legislation provides for a secondary supplemental privilege assessment of $401.28 per month for each patient bed in every nursing facility in the State of Alabama. The supplemental assessment is effective October 1, 2015, and terminates on August 31, 2017. The secondary supplemental privilege assessment imposed by the Act is contingent upon a minimum appropriation of $685 million to Medicaid, and is in addition to all other taxes and assessments currently imposed on nursing homes. This legislation is estimated to generate $8 million in new revenue for the General Fund in FY 2016.
S.B. 13, Act 2015- [Governor’s signature pending] – Property Tax Deferral on New Vehicles: This bill will standardize (and often accelerate) the collection of ad valorem taxes on new and used vehicles, eliminating the current deferral of the tax on new vehicles until the buyer’s next registration month.
S.B. 20, Act 2015- [Governor’s signature pending] – Alabama Tax Delinquency Amnesty Act of 2016: This legislation authorizes the Department of Revenue to conduct a tax amnesty program for a period of at least two months prior to August 2016. The amnesty program will apply to all taxes administered by the Department, except for motor fuel excise taxes, that were due for periods beginning before January 1, 2015. Eligible taxpayers can receive a three-year look-back period in certain cases and a waiver of all penalties and one-half of accrued interest. The legislation also authorizes a “post amnesty collection penalty” not to exceed 20 percent of any additional deficiency assessed for a tax period for which amnesty was taken. This applies unless the additional assessment results from an IRS audit (“RAR”) adjustment (and the taxpayer notifies the Department within 60 days of receipt of the RAR adjustment), or if the amnesty application was based on a preliminary or final assessment issued by the ADOR.
Bills that Died in the Second Special Session but Will Likely Resurface
H.B. 15 – Motor Vehicle Rental Tax Increase: A bill to increase the vehicle lease tax from 1.5 percent to 2 percent of the gross proceeds, equalizing the rate with the 2 percent vehicle sales tax, died in the Senate.
H.B. 21 – Business Privilege Tax Reform: This bill would eliminate the annual business privilege tax filing obligation for all business entities with less than $10,000 in Alabama taxable net worth. In addition, the bill would increase the annual maximum amount of BPT due by most entities from $15,000 to $20,000, increase tax rates, and increase the minimum tax due (currently $100). H.B. 21 would also increase the minimum tax due for financial institutions and require financial institutions with in-state deposits to calculate their tax based on those deposits. Finally, the bill would amend the business privilege tax due date for taxpayers subject to the financial institution excise tax from March 15 to April 15, to provide for corresponding tax return due dates for financial institutions.
H.B. 28 – Gasoline Tax: The bill to increase the gasoline tax to help fund the state’s ailing infrastructure program passed out of House committee but never made it to the House floor. The bill would have increased the user fee on gas and diesel fuel by 5 cents per gallon in the first year, and an additional 2 cents per gallon annually thereafter, as long as the average gas price in Alabama stays below the average price over the last ten years. This bill will likely receive serious consideration in the 2016 Regular Session.
H.B. 9 – FICA Deduction: This bill would eliminate the deduction of FICA and self-employment taxes that may be claimed as a deduction against income on Alabama returns. As mentioned, the bill was supported by the Bentley Administration but failed to pass in the House.
H.B. 32 & S.B. 7 – Lottery: This proposed constitutional amendment would enable Alabama to participate in multi-state lotteries. The revenue would be designated for the General Fund.
H.B. 24 – Excise Tax on Soft Drinks: This bill proposed the imposition of an excise tax on bottled or canned soft drinks or bulk syrup or powders used to produce such drinks. The bill would levy an excise tax on certain bottled or canned soft drinks (including nonalcoholic malt drinks and bulk syrup or powders used to produce drinks) sold at wholesale in this state and would provide for the distribution of the proceeds.
S.B. 10 – Ad Valorem Tax: This constitutional amendment would allow the state to levy an additional $5 million in annual state ad valorem tax. The net proceeds of the additional levy would be distributed to the State General Fund for Medicaid purposes.
S.B. 12 – Mandatory Unitary Combined Reporting (MUCR): This controversial bill proposed to amend the state’s corporate income tax code to require that all related entities involved in a unitary business (broadly defined), at least one of which is doing business in Alabama, file one corporate income tax return on a combined basis. Under current law, each entity subject to the Alabama corporate income tax is generally required to file a separate return and separately calculate its own income tax liability, regardless of whether the entity is a subsidiary of or otherwise affiliated with a larger group. Current law also allows corporate taxpayers to file a consolidated income tax return for all members of the federal affiliated group that have nexus with Alabama. This bill would eliminate that filing option as well. Current law expressly prohibits MUCR.Federal-State Filing Date Conformity Bill: One bill that was never introduced leaves a great deal of uncertainty over the filing dates of Alabama corporate and partnership income tax returns for 2016. Readers may recall that Congress recently changed the Federal filing dates for S and C corporations and Subchapter K entities so that the former’s returns are now due on or before April 15 while the latter’s information returns will be due on or before March 15. We understand that the ADOR was drafting a conformity bill, with the encouragement of the Alabama Society of CPAs, but it never surfaced. The authors are seeking guidance from the Department on their plans for next filing season, whether that’s a bill introduced and quickly passed in the 2016 Regular Session (beginning in February) or, failing that, whether the Department will issue administrative guidance and some sort of work-around until a bill is passed.