10/31/2018

Surging Economy Boosts Alabama 2018 General Fund and ETF Revenues

SALT Alert: Alabama Edition

Client Alert

CO-AUTHOR: Emma A. Cummings, Law Clerk, Bradley

On October 29, the well-respected Public Affairs Research Council of Alabama (PARCA), headquartered at Samford University, issued a useful report finding Alabama’s “booming economy” had generated substantially increased tax revenues for the fiscal year ended September 30, 2018. Indeed, both the normally anemic General Fund and the Education Trust Fund (ETF) had collections far exceeding budgeted expectations. For FYE 2018, General Fund collections were up 4 percent from 2017, for a total of almost $2 billion. ETF revenue grew by 6.7 percent, for a total of $6.7 billion. As readers may recall, most growth taxes in Alabama are earmarked for the ETF, including all income taxes and most sales and use taxes.

The General Fund ended the fiscal year with a balance of $80 million, while the ETF had a balance of $336 million. Of that, $64 million of the ETF balance will be moved into the Budget Stabilization Fund, while the remaining $272 million will be transferred to the Advancement and Technology Fund. As the PARCA report points out, the latter funds can be spent by the Legislature on a defined list of items, including the purchase of education technology and equipment.

PARCA attributes the growth of the General Fund and the ETF to the growing economy and secondarily to the effects of the Tax Cuts and Jobs Act of 2017, often referred to as federal tax reform. With decreasing federal income taxes, Alabama income tax collections increase because certain federal taxes are deductible from one’s state income tax liability, according to our state constitution. Thus, the less federal income tax one pays, the more they will pay (ordinarily) in Alabama income tax. Budget officials in Montgomery estimate that the change in the federal tax law alone will cause an annual increase of $30 million to $40 million in Alabama income tax receipts.

The report concludes: “The strong performance in 2018 indicates the state should not have a problem meeting the spending levels set in the 2019 budgets.” As one legislative leader (who wished to remain anonymous) lamented, however, sometimes good budget news puts the state Legislature in a dilemma. When revenues are flat, it is easier to deny requests for increased budgets or for tax relief, but if there is a surplus, “everybody comes out of the woodwork asking for more money.” It is likely that we will see a flurry of bills next March that would spend the surplus (and probably more), including proposals for increased low income and middle class tax relief.

Almost simultaneously with the PARCA report, the Urban Institute issued a comprehensive research report, “State Tax Revenues Soar in the First Quarter of 2018”, finding that total state tax revenues from all regions of the U.S. showed strong growth in Q1, 2018. The report noted that state government tax revenues grew from all positive economic factors, but concluded the growth was primarily due to the Tax Cuts and Jobs Act. Specifically, state and local government tax revenues from major sources were up 6.6 percent in the first quarter of 2018 compared to 2017. We commend both reports to your reading.

Bruce Ely has served as counsel to several state tax reform and constitutional law reform commissions over the years and is a longstanding member of the Board of Directors of PARCA. Emma Cummings is a law clerk for the firm’s SALT Practice Team and is a third year student at the Cumberland School of Law at Samford University and a member of the Law Review Editorial Board.

Bruce P. Ely