As debate continues over Gov. Bob Riley’s proposed tax and accountability package, readers of The Alabama Baptist have urged that the paper provide reliable, unbiased information so they can further study the issue. The readers want to make an informed and educated decision when they go to the polls on Sept. 9.
In an attempt to answer that call, The Alabama Baptist went to the Public Affairs Research Council of Alabama (PARCA), a nonpartisan, well-established research organization in Alabama. Below are frequently asked questions about the tax aspect of the plan. The answers are provided by PARCA.
Q: If the tax plan passes, what will be the overall impact on taxpayers?
A: The plan will reduce the state income tax liability for low- and moderate-income taxpayers. For single taxpayers, the reduction will extend to taxpayers just below the $20,000 income level, but for married joint filers with three children, reductions will occur even above the $50,000 income level.
The plan raises the income tax threshold for a family of four from the current $4,600 (lowest in the United States) to at least $16,490 in 2004.
The plan will help offset the regressive nature of the state’s high sales taxes, which unavoidably create a heavier burden on these same households. The result will be a tax system that, overall, has a more proportional impact across all income levels.
At higher income levels, taxpayers will see increased state income tax burdens. For instance, a single taxpayer making $75,000 paid $2,383 in taxes in 2002 but could pay up to $3,252 by the year 2007. A married couple with three children and making the same amount paid $2,554 in 2002. That couple could pay up to $2,704 in 2007.
The plan is estimated to produce about $375 million in additional individual income tax revenue annually, when fully implemented. The revenue will be placed in the Alabama Excellence Initiative Fund, where it will be available for annual appropriation for either educational or general state purposes, as decided in the Executive Budget and legislative appropriations.
Q: How are property taxes affected with the tax plan?
A: The plan amends state laws related to the ad valorem tax on property.
Currently, property is divided into four classes for tax purposes. Each class is taxed at a different percentage of market value, but all classes are subject to equal tax rates. The state tax rate is 6.5 mills, or 0.65 percent (1 mill equals 0.1 percent); local tax rates for county, municipal and school purposes vary widely and are subject to constitutional limits that restrict the adoption of new taxes, tax rates and the overall burden of property taxes.
The tax plan would provide for a transition period after which property will be assessed for purposes of state taxation at 100 percent of market value, with a reduced tax rate equal to 3.5 mills or 0.35 percent. For property in classes I, II and III, the local tax base also is affected by the new law. None of the existing property tax limits is diminished.
The new law broadens the definition of residential property to include homes under construction and residential lots under development (currently, a property parcel is classified as commercial until owned and occupied as a residence). The new law also will modify the rules for homestead exemptions and for
current-use assessment.
Class IV includes private passenger automobiles and pickup trucks owned for personal use. These autos currently are assessed at 15 percent of market value for purposes of taxation, and the tax is collected when the auto is registered. Class IV automobiles will be taxed at 100 percent of market value in 2006, after a three-year phase-in (45 percent in 2003, 63 percent in 2004 and 81 percent in 2005). Local property taxes on Class IV autos will continue to be assessed at 15 percent of market value.
Q: How will the tax rate in Alabama change under the new plan?
A: Under current law, the Alabama income tax rate is 5 percent on all taxable income except for the first $6,000 on joint returns ($1,000 is taxed at 2 percent and the next $5,000 at 4 percent) and the first $3,000 on other returns.
The proposed tax rate is 5 percent for all taxable income up to $150,000 for a married joint return, and 6 percent above that level. The 6 percent rate begins at $75,000 of taxable income for single filers and at $112,500 for heads of household.
The tax will be calculated using federal adjusted gross income as the starting point. Using federal adjusted gross income retains many tax benefits available under current Alabama law. Examples of amounts which are not taxed include the following: trade or business expenses; Alabama and U.S. bond interest; the first $250,000 of gain on the sale of a personal residence; employee fringe benefits; losses on the sale of property; IRA contributions; and alimony payments.
The income tax changes would not take effect until the 2004 tax year. For the 2003 tax year, taxpayers will deduct 75 percent of their federal income tax liability, rather than the 100 percent deduction now available.
Q: How will the standard deduction for income tax filers change?
A: Currently the maximum standard deduction available to married joint filers under the Alabama income tax is $4,000, which is twice the standard deduction allowed single filers.
Under the proposed plan the standard deduction for married joint filers will rise to $7,950 in 2004, and it will be set to equal the federal standard deduction thereafter. The federal standard deduction is indexed, which means that it rises each year by an inflation factor; the tax plan thus provides for annual increases in Alabama’s standard deduction.
The federal income tax has had a “marriage penalty,” in part because the standard deduction for married joint filers has been less than twice the amount allowed single filers. To cure this inequity, the federal standard deduction for married joint filers will be set at $9,500 in 2003 and at the same amount plus indexing in 2004, but it is unclear whether this increase will become permanent then or not until 2009. Alabama’s standard deduction for married taxpayers from 2005 to 2008 will either be $7,950 plus indexing or $9,500 plus indexing – double, or more than double, what it is today.
Q: What will happen to itemized deductions for income tax filers?
A: Current state law allows itemized deductions that are more generous than federal law, particularly for medical and dental expenses and for taxes paid.
The proposed plan limits itemized deductions to interest paid, charitable contributions and medical expenses, as defined in federal income tax law; it also ends the current deduction for federal income tax payments. While the itemized deductions would be reduced, the standard deduction and personal exemptions available to all taxpayers would increase.
Q: How will personal exemptions change under the new tax plan?
A: Current state law allows a personal exemption of $1,500 for each adult and $300 for each child in the household. The proposed personal exemptions will be the same for adults and children, and they will be set at 70 percent of the federal personal exemption.
The federal personal exemption for 2003 is $3,050, which would translate into a state personal exemption of $2,135 ($3,050 X 70 percent = $2,135). The federal personal exemption rises each year by a cost-of-living factor, and the Alabama personal exemption would rise proportionately.
Q: Will benefits to retirees be affected by the proposed tax plan?
A: Benefits to retirees are strengthened under the proposal. Under current law, Social Security benefits and defined benefit plan payments, including military and civil service retirement, are not taxed. The new law retains these exemptions and adds a new exemption for payments from defined contribution plans and IRAs. These will be phased in so that, by 2011, $40,000 of receipts from these plans will be deductible each year.
Q: How does the federal tax cut relate to the tax plan?
A: There are two features of the federal income tax law that will offset the increased tax burden for many Alabama taxpayers under the new tax plan:
- The newly enacted federal income tax cut will be much larger than the increased state tax payments for many. The federal income tax burden is higher than the state income tax burden for many taxpayers who will be subject to tax increases under the state’s plan. These taxpayers will see a large federal income tax reduction during the same period when their state income and property taxes are rising.
- The federal tax deduction for state taxes means that 15 percent to 35 percent of the state tax increases will be offset by reductions in the federal income tax for taxpayers who itemize.
Q: How would homestead exemptions be modified?
A: Homeowners who are over 65, blind or disabled pay no state property tax on their homesteads. For homeowners under age 65, homesteads of up to 160 acres currently are exempt from state property taxes in the amount of $4,000 of assessed value (which equals $40,000 of market value). The state homestead exemption for homeowners under 65 will rise to $50,000 in 2006, after a three-year phase-in period ($42,500 in 2003, $45,000 in 2004 and $47,500 in 2005), and it will apply to an expanded area up to 200 acres. Owners of farm or timber property may choose a “farmstead exemption.” The farmstead exemption, to be phased in over four years, will apply to 200 acres or $150,000 of improvements used in farming or forestry.
Homestead exemptions also exist for local property taxes in amounts that vary in part according to the decisions of municipal and county governmental authorities. These exemptions are not changed by the plan.
Q: How is the “current use” law impacted under the new plan?
A: Currently the owner of a Class III property may have the parcel taxed according to its current use rather than its fair and reasonable market value. For farm and forest land, state law contains formulas that create a “standard value” for current use properties. The land is classified by its soil characteristics, and data are used to estimate its income potential and capitalize that into a current use value. The tax plan provides for increasing the values determined by the current-use formulas for farm and timber property by 22 percent, to be phased in over a period of four years from 2003 to 2006. The plan also will phase in over four years a limit of 2,000 acres under current-use assessment for any property owner.
Q: How are the sales taxes impacted with the tax plan?
A: There are three ways in which sales taxes will be impacted:
- It eliminates the current lubricating oil tax and makes lubricating oil subject to state and local sales taxes. Estimations indicate the increases will range from about $5 per year for low-income families to $16 for high-income families.
- It increases the state tax on automobile purchases from 2.0 percent to 2.5 percent, a reduced rate from the standard 4 percent state sales tax. This does not affect local tax rates on automobiles. The estimated additional tax amounts to $8 a year for low-income families and $32 for families above $70,000 income.
- It levies a sales and use tax on warranty service contracts and services related to repair and installation of tangible personal property — does not include repairs to the home or fixtures in the home (plumbing, electrical wiring and air conditioning). It also does not include repairs or installations to the human body or animals (haircuts, manicures or veterinary services). Estimates indicate the increases range from $11 for low-income consumers to $48 for those over $70,000 income.
Share with others: