[co-author: Christopher Nett, Tax Law Intern*]
Just before Christmas, the influential Public Affairs Research Council of Alabama (PARCA), the nonpartisan think tank headquartered at Samford University, released its annual report, How Alabama Taxes Compare. The contents and conclusions come as no surprise to Alabamians familiar with earlier editions of the report or Alabama taxes generally. Alabama, yet again, ranks last among the states in its collection of tax dollars per resident. According to PARCA Senior Research Associate Tom Spencer, “In terms of tax revenue available to fund state and local governments, Alabama governments have less to work with on a per capita basis than governments in any other state. That stems from having a smaller base of wealth to tax and low tax rates, in particular, low property taxes on homes, timberland, and agriculture property.”
With the most recent data from 2016, PARCA also determined that Alabama had fallen to number 50 in relation to our state and local ad valorem property tax collections.
With $15.6 billion in taxes collected, or $3,203 per resident, however, Alabama experienced a slight increase in tax collections in 2016. Nonetheless, this small bump was not enough to move Alabama out of its last place slot, which has been the norm since the early 1990s, according to Spencer.
As the median value for state and local taxes per capita ($4,484) consistently finds itself well above Alabama’s ($3,203), the question always arises: What are we missing out on? As Alabama passes up an additional $1,281 in tax collections per capita, Alabama forgoes an additional $6.2 billion in tax dollars annually. This surprisingly large sum of money, as the report goes on to say, could be spent “building and maintaining roads; providing police and fire protection; operating civil and criminal courts; supporting schools and colleges; libraries and parks.”
Focusing on Alabama’s gross domestic product (GDP), a measure of economic output, 7.6 percent of its GDP is collected in taxes, according to the report. The average among the southeastern states comes in at approximately 8.1 percent, and the national average is 9.7 percent.
The Balancing Act
Discussed in previous PARCA reports, the lopsided distribution of the Alabama tax system consistently puts a heavy burden on certain groups of taxpayers. States typically depend on a mixture of three main tax sources: income, property value, and sales transactions. Mentioned earlier, Alabama’s property tax collections have fallen to the lowest in the nation. People who own homes, and people and companies that own farms and timberland, are the primary beneficiaries. Not only are these classes of properties assessed on just 10 percent of their value, the taxable value of homes is often reduced further as homestead exemptions are applied.
Due to the structure of this system and the political and legal boundaries involved, the likelihood of a statewide increase in the property tax looks slim. Taxes on commercial and industrial property are assessed at 20 percent of their value, while property owned by public utilities is assessed at 30 percent of its value. Thus, an increase in property tax would be felt most by businesses and utilities. This burden would – in turn – very likely be passed along to the taxpayers of Alabama. Based on this trickle-down effect, caps were long ago placed on assessed values for property tax in the Alabama Constitution, as well as the need for approval of any proposed increase by the Alabama Legislature and, in many cases, a public referendum. A good example is the City of Hoover’s recent announcement that it will seek approval from the Legislature this Spring, and then from its residents, on a proposal to increase the city’s property tax levy by 2.4 mills to fund several education-related projects. There is generally a 75 mill cap imposed by state law.
With the limits placed on property tax collections, the state has over the years explored other avenues to gather revenue. Alabama has found itself relying heavily on the sales tax. Imposing one of the highest aggregate (state, city, county) sales tax rates in the country; the burden of this heavy tax is felt disproportionately by low– and moderate- income families. The PARCA report points out that Alabama remains one of three states that still applies its sales tax fully to food or grocery purchases for home consumption without offering any relief for low- and moderate- income families who don't qualify for the federal SNAP program. Given that the poor pay a greater share of their income toward food essentials and therefore toward sales tax, a recent analysis by the Institute on Taxation and Economic Policy reported that Alabama has the 18th most regressive tax system in the nation.
This trend of taxes weighing heavily on the poor also manifests itself in the assessment of income taxes. Despite recent legislative efforts, Alabama still imposes one of the lowest thresholds for taxing income in the nation. The essentially 5 percent flat tax ensures that low-income families start being taxed earlier than those of the same economic standing in many other states. The skewed nature of this statistic is exacerbated because Alabama is one of the few states that allows its residents to deduct the entire amount they pay in federal income and payroll taxes. Since wealthier families typically pay more to the federal government in taxes, thereby reducing the amount they pay to the state government, the burden of trying to finance Alabama’s state and local governments rests more heavily on low- and moderate- income families than in most states, according to the report.
On the other hand, we should also consider another form of funding for state and local governments--- various business taxes. A helpful November 2018 report published by Ernst & Young LLP, Total state and local business taxes, dissects data from the 2017 fiscal year and provides state-by-state estimates for business tax collections. Stated in the report, “These (taxes) include business property taxes, sales and excise taxes paid by businesses on their input purchases and capital expenditures, gross receipts taxes, corporate income and franchise taxes, business and corporate license taxes, unemployment insurance taxes, individual income taxes paid by owners of noncorporate (pass-through) businesses and other state and local taxes that are the statutory liability of business taxpayers.” In line with the previous seven years, business property tax collections nationwide increased yet again, and by the end of fiscal year 2017, Alabama witnessed a 4.3 percent overall increase in state and local business taxes. [Based on our review of recent Alabama Department of Revenue data, we believe this figure has increased even further in the interim.]
EY’s report also breaks down each state’s business share of state and local taxes. In Alabama’s case, the business share for state and local taxes accounts for 45.4 percent of total revenue collections. This percentage places Alabama 24th in the nation and 6th among the southeastern states. PARCA Senior Research Associate Tom Spencer concludes that “absent a move to raise revenue or rebalance our tax system, it’s crucial that state and local governments spend the money they do have efficiently and strategically. That’s just as true now when the economy is booming as it is when the inevitable downturn occurs.”
*Thanks to our intern, Christopher Nett, a senior at Birmingham-Southern College majoring in accounting, for his invaluable assistance in preparing this alert. Bruce Ely is a long-time Board Member of PARCA.
Alabama Opportunity Scholarship Fund Seminars
The Alabama Opportunity Scholarship Fund will be hosting three regional informational meetings for CPAs and others interested in hearing the latest on the IRS and the Treasury Department’s proposed regulations and other pronouncements on limiting the charitable contribution deduction for donations to tax credit SGOs. Bradley partner and AOSF tax counsel Bruce Ely and Lesley Searcy of AOSF will also provide the latest updates on the Alabama Accountability Act and the implications for taxpayers. CPAs may receive 2 hours of PD credit.
Birmingham, February 7, noon
Mobile, February 8, 8 am
Montgomery, February 8, noon
The location will be determined based on the number of RSVPs received by January 31. AOSF will notify all RSVPs of the locations. If you are interested, please contact Bri Jackson at bjackson@alabamascholarshipfund.org.
