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From Governing’s
That’s just one of the elements of Alabama’s badly flawed tax structure that critics cite when they argue for comprehensive reform. “You need a tax system to be fair, adequate and then get out of the way,” says Jim Williams, of the state’s Public Affairs Research Council. If that’s the test, Alabama’s revenue code flunks on all three counts. Consider the sales tax. Alabama relies on general and selective sales taxes for more than half its revenues. But most services are untaxed, and the law is riddled with exemptions and loopholes. About half of the state’s sales revenue, 52 percent of its personal income and 88 percent of its property value are excluded from the tax base.
The law is also numbingly complex: There are four separate sales tax rates, for example, one each for manufacturing and farm machinery; vending machine products; cars; and other general merchandise. Localities can levy their own sales taxes — also with different rates on the four categories — and some of the local rates are staggeringly high. Residents in part of the city of Arab, in the foothills of the Appalachians, pay 11 percent on general goods, including groceries. That’s an extreme, but the combined state/local average sales tax, 8 percent, is itself abnormally high. The main reason it’s so high is simple: Alabama’s per-capita property tax liability is the lowest in the country and is badly skewed in favor of agriculture and rural property owners. Utilities are taxed at 30 percent of their value, businesses at 20 percent, homes at 10 percent, and automobiles at 15 percent. That means that if Alabama raises rates, the increase will have three times the impact on utilities as it does on homes, and twice the impact on businesses. And the rates are written into the state constitution, so they are extremely difficult to change. To complicate matters further, the state has dedicated almost all the revenues from sales and property taxes to education, which leaves little room for discretionary programs, even in prosperous years. In the words of Tom Carruthers, a Birmingham attorney who served as chairman of the state’s last tax reform commission, “the state is essentially out of money.” Despite its perennial revenue shortage, Alabama spent the 1990s doling out hundreds of millions of dollars in corporate tax breaks and worker-training programs to entice Hyundai, Mercedes-Benz and Honda to come in and make automobiles. Opinions differ about how much influence the incentive packages had in securing the deals, and the state doesn’t bother to calculate how much the exemptions and credits cost annually — an exercise that would be extremely valuable. The only way the state has been able to keep its books close to balanced in recent years is by underspending on services. “Prisons are overcrowded,” Williams notes, “and after midnight, there are almost no patrolmen on the highways.” The fiscal problems are likely to get worse because new commitments keep coming up: Into the first quarter of the 2003 fiscal year, the state was forecasting no revenue growth, and teachers just began receiving a 3 percent wage increase. Because the state’s 1901 constitution caps the income tax rate and mandates the four property tax classes, the only way to accomplish real reform would be to rewrite that document, which the legislature has refused to do. Democratic Governor Don Siegelman, who showed some interest in a constitutional rewrite, lost his reelection bid in November. Republican Bob Riley, the man who defeated him, included tax reform as part of his platform, and supporters of revision, centered in the state’s business community, are hopeful that he will take up the cause. But resistance, especially from the rural counties and some farm organizations, remains intense. The Alabama Revenue Department actually performs reasonably well considering the ludicrous law it is asked to enforce. A Taxpayer Advocate office was established two years ago. Despite the need for a more streamlined income tax — Alabama is one of seven states that don’t work off the federal tax form — technology is being leveraged to facilitate processing. Corporations can file their withholding taxes online, and third-party electronic filing for individual income tax returns has been successful. But these technological advances are hampered by a poorly designed Web site that can be inaccessible. Last year, the legislature made the unusual move of allowing corporations, on a voluntary basis, to file combined income tax returns for their parent and subsidiary companies. The more corporations that elect this method of filing the better, as it lessens the loophole that allows businesses in many states to escape payment by incorporating in Delaware, which does not tax holding companies. Of course, until Alabama requires combined filing, there’s little motivation for companies to change their ways. “We’ve brought the business tax system up to the 21st century,” says tax lawyer Bruce Ely. “Almost.” Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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n 2001, it took an annual income of nearly $18,000 in Alabama for a family of four to cross the federal poverty line. But it took only $4,600 for that family to reach the threshold for paying state income tax — less than the amount required anywhere else in America.