Tax Reform

 

By: Rob Collins -- Anniston Star, August 19, 1999

 

 

Most of us learn about taxes through a series of rude shocks. As a child buying candy, you have to give up extra pennies for something called "sales tax." Your first paycheck stub is shot through with minus signs: something called "withholding." You buy a car or a house, and the county or city starts sending you a yearly tax bill.

Small wonder, then, that people don’t like to be reminded of this necessary evil. It doesn’t help that talk about taxes is usually weighed down with terms like "ad valorem," "excise" and "regressive."

And yet this subject is far too important to leave to the lobbyists and special interests who routinely guide Alabama's tax policy. The difference between good and bad tax policy is one that hits every Alabama household right in the pocketbook.

A well managed tax system can improve the quality of life, creating incentives for people to work, hire and invest in a state. A poorly managed system -- like Alabama’s -- gives people abundant reasons to move away.

A fair tax system taxes everyone according to their ability to pay. An unfair system -- like Alabama’s -- creates financial hardships, discourages workers, and widens the gap between rich and poor.

Alabama's tax system may well be be the most unfair in the nation. Our average sales tax, 8 percent, is among the highest in the country. The sales tax hits poor families harder than wealthy families, because the poor must spend a larger share of their income on items subject to the sales tax. The impact of the sales tax only seems lighter because it is assessed a few cents at a time, rather than in one lump sum.

To ease the sales-tax burden, most states tax food at a lower rate than other goods, and some don’t tax food at all. Alabama is one of only eight states that provide no tax relief of any kind on food items.

Sales taxes are high, but property taxes are the lowest by far, thanks in part to "tax relief" laws that protect farm and timber interests. Low property taxes benefit the largest landowners, whether they actually reside in Alabama or not.

Of the 41 states that assess income tax, Alabama is the only one that has done nothing to lower taxes on the working poor. A family of four earning only $4,600 a year must pay income tax to the state.

In Alabama, the poorer you are, the more income you lose to state and local taxes. In 1995, non-elderly married couples earning over $500,000 paid less than 4 cents on the dollar in state and local taxes. But couples earning less than $20,000 paid 11.5 cents per dollar.

The need for reform has been obvious for a long time. Among the proposals that have been made recently:

N By some estimates, Alabama's property taxes could be  doubled and they would still be the lowest in the United States. Most property is assessed at only 10 percent of fair market value, and "current use" rules allow an even lower assessment for farm and timber lands. Reformers have suggested simplifying the rules and rolling back tax rates.

N A panel of legislators is meeting this summer to review dozens of exemptions written into the sales tax code. By plugging the loopholes that benefit special interests, they could significantly increase state revenue.

N Removing the sales tax on food and drugs would help reduce the unfair tax burden on low- and middle-income families.

N Several states have enacted a tax break for low wage earners, the Earned Income Tax Credit (EITC). The federal EITC gives a refund to those who work, but whose earnings are still too low to lift them out of poverty.

N Standard deductions and dependent deductions for state income tax could be increased, and upper-income tax brackets could be raised. These have not been adjusted since the income tax was introduced in the 1930s.

So what would an ideal tax system for Alabama look like? Not only would it be fair; it would generate enough revenue to meet the state's needs, now and in the future. It would be flexible enough to address changing priorities, and it would allow the state to save for a rainy day.

Rob Collins is a policy analyst with Arise Citizens’ Policy project, a coalition of 130 civic, religious and community groups working for fairer state policies.