In Florida, motorists will not have to pay the state’s 25.3 cent-per-gallon tax on gasoline in October. The suspension of Georgia’s 29.1 center-per-gallon fuel tax was authorized in March and has since been extended into August.
In Tennessee, residents will get a one-month break from paying a sales tax on grocery purchases starting August 1. In Kansas and Virginia, sales taxes on groceries will soon be history altogether.
Faced with inflation rates unseen since 1981 and flushed with money from federal programs related to the COVID-19 pandemic, states are slashing taxes and offering rebates.
For the most part, Alabama has not approved a significant tax cut. None of the big-ticket taxes have been touched, and nothing is likely to happen until at least March – another eight months away - when the Legislature is expected to reconvene for its annual legislative session.
The lack of movement by a Republican supermajority Legislature has groups like Alabama Policy Institute calling for a special state legislative session to consider a tax reliefpackage.
“Alabama’s government has had more money flowing into it than ever over the past two years,” said Justin Bogie, senior director of fiscal policy at the Alabama Policy Institute, a non-profit organization that advocates for limited government and free market policies.
“Federal stimulus money represents current and future taxes against citizens,” Bogie said. “State revenue surpluses represent more money than what is needed to run the government being taxed from citizens. Given those factors, lawmakers should be working to find ways to take less taxes from citizens in the future.”
He added, “We are lagging behind many of our neighbors in that regard.”
Tax Reform
A group of Alabama state lawmakers say they are plenty busy analyzing tax reform, while monitoring the effects inflation has had on state agencies since the fiscal year 2023 budget was crafted in March. That budget doesn’t take effect until October.
One lawmaker described the process as a “deep dive into the Alabama tax structure.”
“We are, of course, looking at the current economic situation and determining what the future looks like,” said state Rep. Danny Garrett, R- Trussville, chair of the House Ways and Means Committee. “If you wait until the sessions starts, it’s too late.”
The governor’s office is also on board. A spokesperson for Gov. Kay Ivey said that “easing the tax burden on hardworking Alabamians” remains her top priority.
The timing is right to follow what a host of other states are doing.
Alabama, for the first time in memory, has a flush budget surplus that one estimate pegs at around $1.8 billion for both the Education Trust Fund and the state’s General Fund.
According to Bogie, through May, the state was “already about $1.4 billion ahead of where it was at that point last year.”
State lawmakers say tax cuts are a possibility, but nothing immediate is on the horizon.
No lawmaker interviewed by AL.com said they anticipate a special session occurring before the end of the year, and none is expected to be called to focus on offering tax relief despite an inflation rate that is rapidly rising above 9 percent and continues eating into Alabama residents’ grocery, gasoline, medical and entertainment budgets.
Lawmakers are also defending the measures they adopted last session that offers income tax relief for senior citizens and tax relief for small businesses.
Efforts at making more sweeping tax reform could run into roadblocks, some lawmakers say, particularly in replacing revenues lost from reducing or eliminating a tax long part of the state’s structure.
Said Garrett, “Yes, we are interested in (reform), and we are doing a lot of analysis right now to try and determine what we might want to consider.”
Rebates?
Some lawmakers closest to budget talks say that a rebate is likely to be the most discussed tax relief measure discussed next year.
This year, 11 states have offered tax rebates to constituents, according to information gathered by the Tax Foundation, a non-profit Washington, D.C.-based tax policy think tank.
Georgia, according to Tax Foundation research, is offering rebates up to $250 for single income tax filers or $500 per household. In South Carolina, the rebates ranged from $100 to $800, depending on the filer’s 2021 tax liability.
Colorado lawmakers, this year, approved one of the highest rebates. Single tax filers will get a $750 rebate in August, while join filers are eligible for $1,500.
State Senator Arthur Orr, R- Decatur, said he feels the “most prudent course of action” is for state lawmakers to “give a hard look at tax rebates” and attempt to quantify what a one-time rebate looks like.
He said state officials are still unsure whether the federal ARPA money could be used to support a rebate.
Orr, chairman of the Senate Finance and Taxation Education Committee, said support for a yet-to-be-defined rebates will depend on a large “a caveat”: The overall state of the economy.
“My fear is of high interest rates and also unemployment increasing, and the economy starts slowing down and we have high inflation,” Orr said. “Those three things scare me.”
Other lawmakers who play a crucial role in crafting the annual state budget, appear to also embrace the idea of a tax rebate next year.
“I would be more in favor of a one-time rebate to the taxpayers, but I don’t know what the figure might be,” said state Rep. Steve Clouse, R- Ozark, and chairman of the House Ways and Means General Fund Committee. “That would come out of the excess income and sales taxes right now to the taxpayers and I think we have room to do that within the Education Trust Fund budget … to do it one-time.”
Inflation’s Impact
Clouse said the ETF, which funds Alabama’s public schools, is in its “best shape it’s ever been.” The $8.2 billion EFT budget approved by lawmakers in April represented the largest the fund has ever been.
But inflation is taking its toll, lawmakers say. Clouse and state Senator Greg Albritton, R- Atmore – who chairs the Senate Finance and Taxation General Fund Committee – have been meeting with state agencies in recent weeks to talk about how inflation has affected the state budget since it was approved in March.
“We want to see if maybe the budget we passed and goes into October is adequate enough on the inflationary pressures hitting right now,” said Clouse. He said the budget reassessment will not affect the pay raises the state approved in the spring, which includes a 4 percent raises for state employees and teachers.
Clouse said the review also examines how escalating fuel costs this summer affected state operations in agencies like Bureau of Pardons and Paroles, the Department of Corrections, and the Alabama Law Enforcement Agency, among others.
He said that Pardons and Paroles, based on information provided last month, estimate they will need to add another $435,000 to its budget on expenses “they were not anticipating for.”
Clouse said that amount, “extrapolated across state agencies” will have an impact on the state budget.
He said the budget review will not require a special legislative session but added that “we want to be able to see if there is a problem area” and, if so, have lawmakers approve a supplemental appropriation when the Legislature reconvenes in March.
Taxes Most In The Spotlight Are:
Grocery taxes
Alabama’s 4 percent sales tax on groceries is routinely up for reconsideration, and it is expected to get another review in the spring.
Income or corporate tax rates
The Tax Foundation points out that most states have made a movement toward offering individual income tax or corporate tax relief.
In 2021 and 2022, 21 states have enacted reductions to their individual income tax rates or reduced the number of income tax brackets. Another 11 states have made reductions to the corporate tax rate structure.
Alabama lawmakers have not made any changes to either rate. The state, like 31 others in the U.S., has a graduated income tax structure. Alabama’s three-tiered rate structure is among the lowest of states that assess an income tax. The maximum income tax rate is 5 percent and 2 percent on the low-end. Nine states, including Florida, does not assess an individual income tax.
Alabama’s corporate income tax rate is 6.5 percent.
“There is a lot of effort to bring down income taxes in places and improve structures, which is good in the long run,” said Janelle Fritts, policy analyst with the Tax Foundation.
The Alabama Policy Institute also favors tackling both tax rates to “enact permanent tax reforms that would help all Alabamians,” said Bogie. Cutting income and corporate sales taxes are among the items they favor.
Fritts said one move Alabama lawmakers should consider next year is to allow state businesses to permanently write off all business investments and allow for “full expensing” to become part of the state’s tax code.
Oklahoma became the first, and only, state to allow full expensing this year. Eighteen states, including Alabama, have this advantage in place for businesses as a part of the Tax Cuts and Jobs Act passed by Congress in 2017. But the federal benefit begins to phase out next year and is set to expire in 2026.
“Alabama follows federal treatment on that right now and that’s a good move so businesses can make the investments they need to make,” said Fritts. “But the federal provisions phase out next year and Alabama has not moved to make that permanent.”
Alabama lawmakers are defending some of the moves they have made in recent legislative sessions. Among them was the adoption of eliminating Alabama’s minimum business privilege tax by 2024, which cuts the $100 business privilege tax in 2023 to $50. The remaining $50 would be eliminated in 2024 and is expected to affect 230,000 businesses.
The taxes generate an estimated $23 million annually to the state’s General Fund.
The tax was created in 1999 and is based on a taxpayer’s net worth. Business entities are liable for the tax for each taxable year and the entity is in legal existence. The maximum business privilege tax is $15,000.
“The business owners are already paying a municipal business license, a business delivery license, and it goes on and on,” said Rosemary Elebash, the Alabama state director with the National Federation of Independent Business (NFIB). “If we can reduce paperwork and any dollar amount to a small business owner, then we are helping out their bottom line.”
Alabama lawmakers are also touting a new exemption they authorized for retirees, by exempting from the state income tax up to $6,000 in taxable retirement income for people ages 65 and over.
The exemption applies to withdrawals from 401(k)-type accounts and individual retirement accounts, known as defined contribution retirement plans.
Officials say those who claim the full $6,000 exemption will save an estimated $240 on their state income taxes.
Orr said he would like to see the exemption raised next year.
“That is a number we can look at pushing north to move to $8,000 to $10,000,” he said.
Orr added, “There are all sorts of tax reductions that I think are possible, including the grocery tax to a lesser extent, but we have to be careful not to harm the state in the long-term or harm education.”
Gas tax
One tax suspension that seems off-limits is a reduction in the state’s 28 cent-per-gallon tax on fuel purchases.
Temporarily halting the state’s gasoline tax became a campaign issue during last spring’s governor’s race as pump prices began to soar. Alabama, through the adoption of the Rebuild Alabama Act in 2019, has seen its state gasoline tax rise by 10 cents-per-gallon over the past three years. The revenues are to support a statewide road construction program.
Some states, like Georgia, acted to temporarily suspend their state’s gas taxes. President Joe Biden, last month, called on Congress to suspend the federal 18-cent-per-gallon tax on gasoline.
Ivey, following Biden’s remarks, said she did not believe relief should come through a fuel tax suspension at federal or state levels. She said that suspending the state tax “could cause more harm than good in Alabama, ultimately costing taxpayers.”
Bogie, who advocates for a special session to provide tax relief for residents, said that lawmakers should revisit the fuel tax increase, and discuss a temporary suspension of all gas taxes.
Garrett said a moratorium on the entire 28 cents would mean that no state money would be generated toward transportation projects, which also means there would be no available state matches for federal projects while the freeze was in place.
Clouse called it a “non-starter.”
“One of the issues there is we use practically all of the money we collect from the state on gasoline for matching federal funds,” he said.
Ivey’s office, though, says it’s committed to finding tax relief – even if that relief isn’t coming until the spring of 2023, at the earliest.
Gina Maiola, a spokesperson for the governor, said the state cannot predict the state of the national economy in March 2023 when the Legislature reconvenes for its annual session. But she said the governor’s team is “exploring closely any options that could help provide relief to Alabamians and ease the pinch we are all feeling in our wallets.”
Said Maiola, “Like every decision the Governor makes, it will be measured, not reckless.”
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