A state’s tax system should provide adequate and stable funding of services with fair and balanced impact on taxpayers. Alabama’s taxes fall short of these qualities in several ways.
Adequacy — In 2007, Alabama ranked 50th in state and local tax revenues per person. The tax gaps separating us from other states were large: $373 million to catch Mississippi (49th) and $1.5 billion to reach the midpoint of Southeastern states. Such gaps affect the capacity to provide the services expected from state and local government (education, roads, public safety, etc.). We have ranked last for several years. The common rationale is that Alabama is a poor state, but five other states, including Mississippi, have smaller tax bases. All five raised more tax revenue to fund services in 2007. Actually Alabama has low tax rates (42nd) as well as a modest tax base (45th). Providing the nation’s lowest tax revenues is, therefore, a matter of choice. We are getting what we pay for.
Stability — Alabama chooses to earmark taxes in a way that produces roller coaster education budgets. “Proration” is often required in midyear to reduce budget gaps. Thus state education spending rose by 12 percent a year from 2004 to 2008 and now has fallen by $1.2 billion with the inevitable economic downturn. The solution is clear: Look ahead further than one year in budgeting, and limit spending to a sustainable growth rate. Educators shouldn’t have to deal with tax revenue instability.
Fairness — In Alabama, the tax burden falls as income rises, an unfair or “regressive” distribution. The sales tax applies mainly to necessities like groceries, and personal exemptions in income tax are too small to protect low-income taxpayers. Both factors contribute to unfairness.
Balance — Alabama’s tax bases are narrowed by exclusions; for instance, the sales tax exempts many services taxed by other states, which raises the burden on taxable items. We have the nation’s lowest property taxes, limiting the stability and adequacy of school finances.
These tax issues are well-known, and a number have legislative solutions. They are discussed more completely in the Fall 2009 PARCA Quarterly at http://parca.samford.edu.
EDITOR’S NOTE — Jim Williams is executive director for the nonprofit, nonpartisan Public Affairs Research Council of Alabama.
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