About Alabama — Considering Taxes

This is an election year for state officials, and normally candidates would shy away from any talk of tax increases. However, both candidates for governor voiced some openness to considering taxes in a recent Associated Press article.

Undoubtedly the main reason for considering a tax alternative is the dire situation in the state General Fund, but the size and shape of Alabama’s tax burden also should be taken into account. Here we look briefly at both issues.

The General Fund budget finances all state services except for those related to education. Revenues to the fund are drawn from a number of small sources and there is little growth potential. To shore up the fund, large amounts have been added from temporary transfers and borrowings that must be repaid over the next several years. Revenues in 2015 are expected to be more than $80 million below 2014 appropriations.

The largest General Fund expenditures are for Medicaid, which provides health care for the state’s large low-income population, and the state prison system, which is overcrowded and under-resourced. These two programs have grown to require 57 percent of General Fund spending, crowding out other services. For example, the state court system in recent years has been funded in part from Public Road and Bridge Fund revenues that normally are used to maintain highways.

Tax burden

The most recent Census Bureau figures show Alabama collects lower state and local tax revenues per resident than any other state. Tax collections in 2011 amounted to $2,904 per capita, which was 67 percent of the national average.

In part, this is due to the fact that Alabama has fewer resources to tax than most other states. Based on United States Treasury Department estimates, our 2011 total taxable resources amounted to $41,552 per capita, which was 78 percent of the national average. Alabama ranked 45th among the states.

But we also tax those resources at a below-average rate. Dividing the tax collections by the taxable resources indicates an effective tax rate of 7.0 percent. The national average in 2011 was 8.2 percent. Alabama ranked 40th.

These data don’t suggest that Alabama’s tax burden would prevent state policy makers from considering a tax alternative in resolving the state General Fund dilemma.