By Jim Williams
The governor and Legislature face a familiar problem: a severe shortfall in the state’s General Fund budget for fiscal year 2016, which starts Oct. 1. This budget, which must be balanced, provides financing for Medicaid, corrections, courts, parks and other non-education services.
Several temporary revenue sources that have propped up the General Fund are expiring, leaving the fund an estimated $290 million short of the resources needed to maintain the 2015 spending level. There is disagreement over the right approach to resolving this problem. The basic choices are to cut spending or increase taxes.
Time to decide
Neither the most recent legislative plan to cut spending nor the governor’s plan to increase taxes prevailed in the regular legislative session or in a special session called by the governor; a second special session began Sept. 8. The time for deciding what to do is short.
In making this decision it’s important to consider whether Alabama’s taxes are high or low. Comparisons based on Census data tell us that they are low.
Alabama’s taxes are low in relation to economic activity.
From a taxpayer’s point of view the best measure of the tax burden comes from comparing state and local tax collections to the size of a state’s economy. (See chart right. We add state and local taxes together because states vary in how they administer services, and we focus on regional comparisons because the cost of living varies across the country.)
In 2012, the most recent year available, Alabama’s state and local tax collections were 7.6 percent of the state’s economic activity. Six of our southeastern neighbors had higher tax rates while three were lower. The national average was 8.6 percent, a full point higher, and Alabama ranked 40th among all states.
State and local tax collections in Alabama amounted to $14.2 billion in 2012, according to the Census Bureau. If the governor and Legislature were to agree on $300 million in additional taxes, the percentage of taxes based on economic activity would be 7.76 percent moving Alabama into a virtual tie with North Carolina which is immediately above our state in the chart.
Modest rate suggested
It is interesting to note that Mississippi and Arkansas, which had the highest tax rates in the Southeast, also had higher growth in per capita income from 2001 to 2012 than all of the other states in the region except Louisiana. This suggests that the impact of tax rates in this range is modest.
Alabama has the nation’s lowest tax revenue per capita.
Dividing tax collections by a state’s population creates a measure of the adequacy of taxes for providing public services. Alabamians, like the residents of other states, want good roads, police and fire protection, courts, public schools and colleges, libraries, parks and so on. Taxes per capita are a measure of the resources made available within the state for this purpose.
In 2012, the most recent year available, Alabama’s tax collections per capita amounted to $2,951, the lowest in the United States and a third below the national average (see chart, top of page). This is not a new situation: Alabama has ranked 50th in taxes per capita since 1994. The ability of our governmental agencies to provide adequate and efficient services is obviously affected.
The closest state to Alabama was South Carolina, ranking 49th at $3,020 per capita. The difference between the two states amounts to $332 million in total revenue, given Alabama’s 4.8 million residents. By this measure, if the governor and Legislature were to agree on $300 million in additional taxes, Alabama would still rank 50th in taxes per capita.
These comparisons suggest no reason to avoid considering taxes as part of the resolution of Alabama’s budget problem.
Editor’s Note — Jim Williams is executive director of Public Affairs Research Council of Alabama.
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