Four things to know about Alabama’s 2016 funding challenges

It’s the latest verse of a decades-old song: Alabama faces yet another funding shortfall next year for vital services like Medicaid, mental health care and corrections. Here are four things to know about the budget challenges facing the Legislature during the 2015 regular session that began Tuesday.

(1) Alabama’s revenues for the budgets that fund education, health care and other services still haven’t returned to pre-recession levels.

Alabama has two major state budgets: the Education Trust Fund (ETF), which pays for K-12 and higher education, and the General Fund (GF), which provides a major chunk of the support for vital non-education services, including Medicaid, mental health care, corrections and public safety. The picture that revenue officials painted for each on Tuesday was bleak.

Economic struggles during and after the Great Recession hammered both budgets, and neither has seen revenues return to pre-recession levels. GF receipts last year were down 15.5 percent since 2008, according to the Legislative Fiscal Office (LFO), and ETF appropriations this year are down 12.2 percent from their 2008 level. Alabama’s K-12 cuts since 2008 are the nation’s second worst, while our higher education cuts are the nation’s fifth worst. Alabama’s unemployment rate is improving, but revenues still aren’t growing nearly enough to undo the damage wrought by the Great Recession.

(2) The General Fund shortfall is persistent, and it’s not going away on its own.

The picture is especially bleak for the GF. Alabama’s education budget draws most of its money from state sales taxes and individual income taxes, which grow as the economy improves. But the GF relies on a hodgepodge of other revenue sources, most of which are slow to grow even during boom times.

That leaves the GF with a structural deficit, meaning revenue growth is not strong enough to keep pace with ordinary cost growth for vital services like Medicaid, mental health care and corrections. Without new GF revenue, these services continually will remain at risk of massive cuts.

(3) Alabama needs new revenue to avoid devastating cuts to vital services like Medicaid, mental health care and corrections.

How bad could the cuts for Medicaid, mental health care and other GF services get without new revenue? Perhaps most dramatically, failure to address the GF shortfall could spell disaster for Medicaid, which provides health coverage for one in five Alabamians and already has been cut to the bone of federally required coverage provisions. Even small further cuts could endanger lives.

GF cuts could mean even shorter staffing for the state’s overcrowded prison system, which operates at nearly twice its designed capacity. It also could mean fewer state troopers on the highways, more trial delays, longer lines to renew a driver’s license, or long waiting periods for many families seeking ALL Kids health coverage for their children.

Next year’s GF shortfall will be $264 million, according to Executive Budget Office (EBO) estimates. That would be a 14 percent drop in a perennially underfunded budget that already struggles to fund barebones service levels.

But the funding challenges don’t end there. EBO’s Bill Newton said Tuesday that Alabama also needs an additional:

  • $155 million to maintain current service levels for Medicaid and corrections,
  • $63.5 million to cover public safety costs that now are being covered by a transfer from the state’s road and bridge money,
  • $26 million to pay for expanded community corrections and other recommendations of the state’s Prison Reform Task Force, and
  • $32.5 million to begin repaying the $161.6 million that the state borrowed from the GF’s rainy day account and must restore by 2020. (So far, Alabama hasn’t repaid a dime.)

Add it all up and it comes to $541 million in new GF revenue needs. That’s the amount that Gov. Robert Bentley proposes to raise with a mix of tax increases and loophole closures. “We must break the cycle of budget shortfalls year after year after year,” Bentley said Tuesday night during his State of the State address. “We must have adequate means.”

(4) Taxing low-income Alabama families deeper into poverty is not the way to cure our funding woes.

Alabama’s tax system is upside down. Low- and middle-income families pay twice as much of their income in state and local taxes as the top 1 percent of earners do. It’s an imbalanced structure that makes it harder for low-income families to escape poverty and leaves them with less money for the consumer spending that fuels economic growth. The main driver of this upside-down tax system? High sales taxes, especially on groceries and other necessities that account for a big share of low-income families’ household budgets.

Significantly, Bentley’s plan would not increase taxes on food, clothing or over-the-counter drugs. Instead, the governor proposes to raise more than $400 million by increasing the state’s cigarette tax and sales tax on automobiles. Bentley’s proposal would boost the cigarette tax from 42.5 cents per pack to $1.25 per pack and would increase the state sales tax rate on automobiles (now 2 percent) to match the 4 percent rate that applies to other consumer goods.

The rest of the new revenue would come from a mix of business tax increases and loophole closures. (One proposal is for Alabama to adopt combined reporting, which would treat corporations and their subsidiaries as one corporation for tax purposes. You can learn more about combined reporting here.)

Strong investments in services like education, Medicaid and public safety promote economic growth and improve our state’s quality of life. By funding those investments without raising taxes on necessities like food and clothing, Alabama can give everyone a better opportunity to get ahead in life.

By Chris Sanders, communications director. Posted March 4, 2015.