A new report by the Public Affairs Research Council of Alabama (PARCA), a well-respected nonprofit research organization headquartered at Samford University in Birmingham, shows that frequent statements during the 2012 presidential campaign that 46 percent of U.S. households pay no federal income tax does not capture the entire picture. That is certainly true in Alabama and almost every other state when the full tax burden—including state and local taxes—is evaluated. PARCA’s analysis confirms that low-income residents of Alabama pay a disproportionate share of the total tax burden at the state and local level because of the sources of Alabama’s tax revenues.
“Attention has been focused in recent years on the fact that a substantial percentage of low-income households don’t pay federal individual income taxes,” said Tom Spencer, senior research associate at PARCA. “It’s important to remember, though, that those same households tend to pay out a disproportionate share of income in state and local taxes. That is particularly true in Alabama, where many of the mechanisms other states use to equalize the tax burden are missing.”
The updated analysis from PARCA, Taking Stock of the Size and Burden of the Taxes Alabamians Pay, was published on April 25 and drew from U.S. Census Bureau data, from the Minnesota Center for Fiscal Excellence’s recently published “Comparison of Individual Income Tax Burdens by State,” and from national research organizations like the Tax Foundation, the Urban Institute-Brookings Tax Policy Center, and the Center on Budget and Policy Priorities (CBPP). All indicated that in Alabama, far from escaping tax liability entirely, low-income households actually have a significant tax burden.
Jim Williams, long-time executive director of PARCA, pointed out that while Alabama’s state and local taxes are among the lowest in the nation, they lack the balance among income, sales, and property tax sources that would contribute to fairness. Federal taxes are predominantly comprised of the individual income and payroll taxes, which account for 82 percent of total federal tax revenue. In contrast, states on average derive only 21 percent of their tax revenue from individual income taxes (Alabama gets about 20 percent), with the remainder coming from property taxes at 35 percent, and 34 percent from sales/use taxes. However, in Alabama, property taxes bring in only 19 percent of the total tax revenue, while sales/use taxes bring in most of the rest—a whopping 47 percent.
Sales taxes are by their nature some of the most regressive taxes since they equally tax survival and luxury goods and, unlike income taxes which have personal exemptions, sales taxes have no threshold to cross before the tax starts accumulating. This regressiveness is exacerbated in Alabama because, as Spencer noted above, the state lacks key mechanisms that make taxes more progressive. The individual income tax in Alabama is basically a flat tax since the brackets have not been been adjusted for inflation in decades and the top tax rate kicks in at only $6,000 of taxable income. Furthermore, Alabama offers relatively small personal exemptions and deductions on the individual income tax with the result that Alabama begins taxing (at the state’s highest marginal rate) at one of the lowest thresholds in the U.S. Additionally, Alabama fully taxes the sale of groceries, being one of only two states to do so. Legislative efforts to exempt groceries from sales tax have been continual but each has failed, largely due to the need to find a revenue offset. Finally, Alabama provides a benefit to top wage earners that most states do not: a full deduction for federal income taxes paid, which means that high-income households that pay more federal income tax pay even less state income tax. Legislative efforts to repeal or limit the FIT deduction for individuals have met with no success, particularly since that deduction is embedded in the Alabama Constitution and require a public referendum.
The PARCA analysis concluded that Alabama’s unbalanced tax regime results in residents having the eighth lowest combined federal, state, and local tax burden in the U.S., but that burden falls disproportionately on low-income families. In Alabama, the report concluded that the lowest 20 percent of income earners pay more than 10 percent of their income in state and local taxes, while the top 1 percent pay only 3.8 percent of their income in the same taxes.
The PARCA website includes a number of helpful reports on a variety of state and local government fiscal, education and tax policy issues.