Alabama Legislature Signals Reexamination of Tax Incentives and Exemptions

State and Local Tax Alert: Alabama Edition

Client Alert

Author(s) , , ,

Following a contentious special session in which multiple proposals for a state-wide lottery were debated then abandoned, the Alabama Legislature adjourned on September 7 after approving an approximate $640 million bond issue that pledges the annual payments to the state from the BP Oil spill fund. Governor Robert Bentley signed this proposal, HB 36, into law on September 8. The legislation represents a compromise between South Alabama legislators and others, proponents of increased Medicaid funding, and proponents of repaying large borrowings from the Alabama Trust Fund. There are many news articles and reports on the compromise; this SALT Alert focuses on other tax legislation and resolutions that passed with little fanfare but which could be extremely important.

President Pro Tem of the Alabama Senate, Senator Del Marsh (R-Anniston), introduced and quickly passed Senate Resolution 20 that establishes an exploratory committee aimed at evaluating many aspects of Alabama’s tax system. The resolution is quite broad in scope but lacks detail. It cites the need to provide relief to Alabama families from various federal “regulatory and tax burdens” imposed in recent years by establishing an “Interim State Tax Relief Committee.” The committee is to be composed of Sen. Marsh, who will serve as the committee’s chair, along with seven additional senators of his choice. SR 20 charges the interim committee to “study all facets of the current tax system in the state.”

In the meantime, House Joint Resolution 62 was adopted in the House of Representatives on August 25 and approved by the Senate on September 6. HJR 62 tracks SR 20 in part by proposing a Joint Legislative Task Force on Budget Reform to examine certain aspects of Alabama’s tax code in an effort to relieve the state’s recurring budget shortfalls. Senator Marsh has advised the media that the two study groups will be “merged” even though only the HJR prescribes the appointment of seven members from the House, to be appointed by House Speaker Mac McCutcheon (R-Monrovia). Recent comments by Sen. Marsh offer of a glimpse into what this joint task force will focus on. In a recent interview with the Birmingham Business Journal, Sen. Marsh stated: “We are approaching this as though we were pressing a reset button, and eliminating all credits and incentives, and see what it would look like, and start from there.”

HJR 62 also differs from SR 20 by focusing more on the elements affecting Alabama’s budgets, including the apparent goals of implementing biennial budgeting for both the continually anemic General Fund and the Education Trust Fund, greater performance accountability for state government departments, and the unearmarking of revenue accruing to the state. What caught the attention of many in the business and economic development communities is the language in HJR 62 establishing a review process for all existing state tax credits, deductions, and exemptions, citing the “loss of approximately $4.5 billion in revenue to our state budgets each year.” The HJR provides little detail as to the mechanism(s) that may be used to examine existing tax credits, deductions, and exemptions, except to state that the review will coincide with the creation of “a policy to ensure that future tax credits effectively provide economic gain to the state.”

The Alabama legislature is not alone in turning its focus to its tax code in hopes of finding additional and stable revenue sources to plug perennial budget shortfalls. Recently, the legislatures of Louisiana, Mississippi, South Carolina, Georgia and West Virginia have established similar committees to examine possible paths to reforming their respective tax codes.

Difficult decisions face the Alabama legislature in the coming months. The state faces a budget shortfall due to the rising costs of its Medicaid program, whose outlays are projected to rise exponentially in the coming years, along with crumbling and over-crowded prisons and needed repairs to its infrastructure. Due to the demise of any hope for lottery gaming in the near future, all options for additional sources of revenue appear to be on the table for consideration.

Both resolutions adopt a deadline for their respective committees to report their findings no later than the fifth day of the 2017 regular session, which begins February 14. This leaves important decisions with far-reaching impact to be made with little time allotted. All eyes will be on the joint task force as it officially begins its work later this month.