Tax Reform 

 

By: Rob Collins -- Tuscaloosa News, May 7, 1999 

 

Don’t look now, but Alabama is in the midst of another fiscal crisis. As in years past, state leaders find that they cannot pay the bills without asking for sacrifices.

 

Who will have to give up the most? Poor families and children, of course. As it now stands, the General Fund budget for 1999-2000 will pinch the Department of Human Resources harder than any other state agency. That means the state’s measly contributions to its neediest families are set to dwindle even further.

 

This year’s budget crisis began when the U.S. Supreme Court struck down the state corporate franchise tax as unconstitutional. That knocked more than $100 million out of the General Fund.

 

Of course, business people had been complaining about the franchise tax for years and warning that it would not stand up to a court challenge. That’s why critics say that the state should have seen this one coming and planned ahead.

 

But planning ahead has not been Alabama’s style.

 

In its landmark Government Performance Project report on the 50 states, released this spring, Governing magazine gave Alabama a D+ for financial management, D- for capital management, and an F in “managing for results.” In all three categories, Alabama’s grade was the worst of the 50.

 

The Governing report card on Alabama portrays a state government that has slouched from crisis to crisis, while skimping on essential services and bracing for the next federal lawsuit. “We don’t provide the level of services that are needed until we get sued,” one state legislative staffer told the magazine.

 

A low-tax state?

 

Meanwhile, other pundits celebrate Alabama’s supposed status as a “low-tax” state. A Washington group announced on April 15 that Alabama leads the nation in “tax freedom.” But that claim was based on an oversimplified average of all state taxes, including corporate taxes. The group’s figures were of no use in gauging the amount of tax paid by Alabama households.

 

Our state’s reputation for low taxes is founded on its extremely low property taxes and generous income-tax deductions, which primarily benefit wealthy households and businesses. Only two states outclassed Alabama in a recent survey of “wealth friendly” states by Bloomberg Personal Finance magazine.

 

The picture is much bleaker for low-income families. Alabama taxes the poor more heavily than any other state, with the possible exception of Kentucky. There are two big reasons for this: Alabama depends too heavily on regressive sales taxes, and it sets a high income tax on the poorest workers.

 

Sales taxes and excise taxes are called “regressive” taxes because they absorb a much larger proportion of a poor family’s income. Most states earn about a third of their revenue from these taxes, but Alabama gets more than half of its revenue in this way. What’s more, Alabama is one of a very few states that do not exempt food and medicine from the sales tax.

 

Alabama also exacts a heavy income tax from poor workers, even while giving generous deductions to the wealthiest. For example, a family of four earning as little as $4,600 a year must pay Alabama income tax. In the 1990s, 40 of the 41 states with income taxes have changed their tax codes to eliminate or reduce the tax burden on families with poverty-level incomes. The sole exception is Alabama, which continues to tax poor families deeper into poverty.

 

According to an analysis by Citizens for Tax Justice, in 1995 the poorest 20 percent of Alabama’s non-elderly married couples paid twice as large a share of their income in state taxes as did the wealthiest 20 percent. Compared with the top 1 percent, the gap was even wider: The poorest 20 percent paid more than three times as much of their income in state taxes.

 

A way out

 

The crisis over the corporate franchise tax would be a perfect opportunity to handle the long-postponed job of comprehensive tax reform. Governor Don Siegelman has postponed that option, but he cannot safely put it off forever.

 

Alabama has waited longer than any other state to address the issue of tax fairness. The state continues to rely on its poorest citizens to bear the heaviest tax burdens. As long as this continues, it is safe to assume that fiscal crises will recur again and again.