PARCA Issues Updated Study: How Alabama Taxes Compare
State & Local Tax Alert: Alabama Edition
The well-respected Public Affairs Research Council of Alabama (PARCA), the non-profit think tank headquartered at Samford University in Birmingham, recently published its periodic report, How Alabama Taxes Compare, which examines the sources and uses of taxes in Alabama and compares those sources to other states. Unsurprisingly, PARCA’s updated report once again reveals that Alabama state and local governments collect fewer tax dollars per resident than any other state.
The annual report also spotlights the unusual composition of tax revenue collected by the state. PARCA claims the state’s current blend of taxes creates an imbalance in its tax system, where the burden falls more heavily on certain groups of people. According to PARCA Senior Research Associate Tom Spencer, although Alabama collects less in taxes per resident than any other state, that still “doesn’t guarantee low taxes for all.”
Alabama’s Per Capita Tax Collections Remain the Lowest in the U.S.
The most recent data, from 2015, reveals that, in terms of revenue collection per resident, Alabama continues to rank at the very bottom, with Alabama state and local governments collecting a total of $15 billion in taxes, or $3,144 per resident.
However, low revenue collections in Alabama should come as no surprise. The state has consistently held onto this last (or first) place ranking—depending on one’s perspective—for nearly 30 years. According to Spencer, Alabama’s lowest-in-the-nation ranking “has been a basic fact of life in this state since the early 1990s” and “it lies at the root of our perpetual struggles to balance state budgets.”
The report goes on to provide that if Alabama collected taxes simply at the per capita rate of the median state, i.e., $1,235 more in taxes per resident, Alabama would have an additional $6 billion annually available to finance the operation of services such as public education, roads, healthcare, and public safety.
The report explains that there are two primary factors that contribute to Alabama’s historically low tax collections: (1) tax rates that are lower than most other states (other than sales and use taxes); and (2) a tax base that is smaller than most other states.
Another way of looking at state and local tax burdens is to focus on taxes as a percent of state gross domestic product (GDP), a measure of economic output. The report finds that Alabama state and local tax collections amount to 7.5 percent of its GDP, or 1.2 percent less than the national average.
Alabama’s Tax Revenues Have an “Unusual Composition”
The report highlights the unusual composition of tax revenue collected by the state, which it concludes unequally distributes the tax burden. According to PARCA, unlike more traditional fair and stable tax systems, which are balanced among the three main principal tax sources (property value, sales transactions, and income), there’s an imbalance in Alabama’s tax system and it levies its taxes in a way that puts the burden more squarely on certain groups of people.
The report concludes that Alabama has the lowest property taxes per capita in the nation. As a percentage of GDP, Alabama’s state and local property taxes amount to 1.3 percent of GDP, compared to the 2.7 percent national average. The report, however, claims that not all Alabamians benefit from these low rates, and instead, there’s an overall regressive nature to Alabama’s property tax regime. PARCA’s report explains that the state’s low property taxes primarily benefit those who own homes, farms, and timberland—properties that are taxed on just 10 percent of their value and can be reduced further either by claiming homestead exemptions or perhaps by low assessment rates in the case of farm and timberland property. Readers may recall, however, that public referendums on increasing local property taxes, other than the renewal of an existing property tax levy that’s typically earmarked for local schools, often fail.
Next, the PARCA report notes that, partly because of Alabama’s low property tax collections, the state has developed a relatively heavy reliance on state and local sales and gross receipts taxes. Alabama’s sales tax rates, when one combines state and local levies, are among the highest in the country. Further, the report finds that Alabama taxes a relatively narrow base, and it continues to fully apply sales tax to groceries and non-prescription medications “without providing any offsetting relief for low- and moderate-income-families.” There have been numerous but unsuccessful legislative attempts to repeal the sales and use tax as applied to food, but they were often tied to a correlative repeal of or limitation on the deduction for federal income taxes, which is codified in the Alabama Constitution.
Lastly, the report concludes that several features of Alabama’s income tax make it regressive as well: The tax is essentially a flat 5 percent tax and starts at one of the lowest income levels of any state in the country. As such, low-income individuals and families start paying state income tax sooner than their counterparts in most other states. Moreover, PARCA says that because Alabama allows individuals to deduct on their state income tax return the full amount of federal income taxes they paid during the year, “those higher earners get a larger break on Alabama income taxes.”
The PARCA report singles out the property tax for a needed fix—pointing out that Alabama’s per capita property tax collections could be doubled and still be below the U.S. average.
Moving forward, however, the PARCA report admits that Alabama cannot simply tax its way to prosperity, and raising the rates will be no small task. That is especially true in an election year. Moreover, the caps on both income and property tax rates are embedded in the Alabama Constitution, so any changes to the rates would require a constitutional amendment, with approval not just from the Alabama Legislature but also by a public vote. The report suggests that legislators look at other income tax deductions not embedded in the state constitution, which could be changed legislatively, with a focus on deductions claimed by high-income earners.
The report concludes, “as the state’s political leadership continues to grapple with how to pay for prisons, roads, health care and education,” they should focus on ensuring that Alabama has a tax system that: (1) adequately provides the level of service and investment needed to make Alabama a competitive state; (2) fairly spreads the burden of paying for needed services and encourages economic independence and advancement; and (3) provides stable and sustainable revenue without imposing undue burden and complexity. All eyes will be on the Alabama Legislature’s Joint Task Force on Budget Reform as the 2018 regular session begins, although few predict any substantial efforts toward tax reform during this abbreviated session. Another stated reason to delay any serious effort at tax reform is the unknown effect on state income tax revenues of President Trump’s and the Republicans’ Tax Cuts and Jobs Act (Public Law No. 115-97). Many believe the net effect of the various provisions will generate increased state income tax revenues, although the full effect may not be felt until the following fiscal year since most provisions of the Act didn’t go into effect until January 1.