‘Flat tax’ plan could raise income taxes on lowest-paid Alabamians

Alabamians struggling to make ends meet could have to pay state income tax on the first $100 they earn under a new “flat tax” proposal that the Senate’s education budget committee considered Wednesday. SB 409 would eliminate all personal exemptions and standard deductions and require an 80 percent majority of both the state House and Senate to add new tax breaks.

Alabama’s upside-down tax system would become even more skewed without such breaks for low-income families. Under SB 409, Alabama would be the only state that shields no income at all from tax. The state’s current income tax threshold – the minimum income level where one begins to pay income tax – is already the nation’s worst: just $12,600 for a family of four.

Overall, Alabamians with low and moderate incomes pay twice the share of their incomes in state and local taxes that the top 1 percent do. Requiring families who live in deep poverty to pay income tax would make that gap even larger.

Low-income workers would pay higher taxes under SB 409, while the richest Alabamians would get a tax cut. Families with incomes below $18,000 a year would pay an additional $73 in income taxes on average, according to an analysis by the Institute on Taxation and Economic Policy (ITEP), a nonpartisan research organization based in Washington, D.C. The top 1 percent, on the other hand, would get a tax cut of more than $3,800 on average, ITEP estimates.

More than half of Alabama families earning less than $18,000 a year would pay more in taxes under the plan, according to ITEP. By contrast, 90 percent of Alabamians earning $431,000 or more would get a tax break.

“Under SB 409 as written, millionaires get a great deal: a tax cut of nearly $4,000 on average,” Arise’s Kimble Forrister told senators Wednesday during a public hearing on the bill. “At the lower end, Alabama families would pay income tax on their first $100. No other state does this.”

SB 409 would replace Alabama’s nominally progressive income tax rates starting in 2017 with a single rate: 2.75 percent for individuals and 4.59 percent for corporations. The top rates now are 5 percent for individuals (on taxable income above $3,000) and 6.5 percent for corporations. The plan – sponsored by Sen. Bill Hightower, R-Mobile – would offset some of the revenue loss by ending the state’s federal income tax (FIT) deduction, which overwhelmingly benefits high earners.

The plan would end most state income tax breaks for individuals – but not for corporations. Individuals could claim a deduction only if it is for a charitable contribution or required by federal law, unless 80 percent of the Legislature approves a new deduction. But SB 409 would protect almost all corporate tax credits, deductions and exemptions. More than 80 percent of SB 409’s corporate tax cuts would benefit out-of-state corporations and stockholders, ITEP estimates.

The proposal also could cut funding for public schools significantly. The plan as written would reduce revenues by $146.5 million a year, the Legislative Fiscal Office estimates. That would pile on even more cuts to K-12 and higher education in Alabama, which has made some of the nation’s deepest K-12 and higher education cuts since the Great Recession. State education funding is still well below 2008 levels.

SB 409 is a proposed state constitutional amendment. It would require legislative approval this year and voter approval in 2016.

The Senate committee carried over the bill at Hightower’s request Wednesday, but it could return later this session. Hightower said he intends to address concerns with the plan by making changes to help protect low-income families and retirees and to avoid reducing education revenues. Read the Associated Press’ coverage for more details.

By Chris Sanders, communications director, and Carol Gundlach, policy analyst. Posted April 28, 2015. Updated April 29, 2015.