Low-income Alabamians pay twice as much in state and local taxes as a share of their income compared to the state’s wealthiest residents, according to a study released Wednesday, Oct. 17, 2018, by the Institute on Taxation and Economic Policy (ITEP), a nonprofit research organization based in Washington, D.C. The study, Who Pays?, analyzes major state and local taxes in all 50 states, including personal and corporate income taxes, property taxes, sales and other excise taxes.
Alabama has a regressive tax structure – meaning the lower your income, the higher your tax rate – and Alabama’s taxes are more regressive than those in most other states, ITEP finds. The Alabamians who earn the least – less than $18,600 a year – pay 9.9 percent of their income in state and local taxes on average. By contrast, the top 1 percent in Alabama – those who make $448,000 a year or more – pay an average of just 5 percent of their income in state and local taxes.
“For decades, big corporations and wealthy households have benefited the most from economic growth,” Alabama Arise executive director Robyn Hyden said. “But Alabama taxes struggling families deeper into poverty while lavishing tax breaks onto people who can afford to pay more. It’s time to modernize Alabama’s taxes by untaxing groceries and requiring wealthy people and corporations to pay a greater share of the cost of education, health care and other public services that make life better for everyone.”
The biggest driver of Alabama’s upside-down tax system is its heavy reliance on sales taxes to raise revenue for public services. That story is similar in many other states, but sales taxes in Alabama are particularly regressive because it is one of only three states with no tax break on groceries.
Alabama is also one of only three states to allow taxpayers to deduct every dollar of federal income tax payments on their state income taxes – a tax break that disproportionately benefits rich households. Recent increases in court fees and other user fees, which fall hardest on families who struggle to make ends meet, also have added to the regressive nature of Alabama taxes.
Such an upside-down tax structure limits Alabama’s ability to invest in services that support economic growth and help all residents stay healthy and productive, according to ITEP. If states fail to address systemic causes of growing income inequality, they will have more difficulty raising the revenue they need over time. The more income that goes to wealthy people (and the lower a state’s overall tax rate on the wealthy), the more slowly a state’s revenue grows over time, ITEP finds.
“Rising income inequality is unconscionable, and it is certainly a problem that local, state and federal lawmakers should address,” ITEP deputy director Meg Wiehe said. “Regressive state tax systems didn’t cause the growing income divide, but they certainly exacerbate the problem. State lawmakers have control over how their tax systems are structured. They can and should enact more equitable tax policies that raise adequate revenue in a fair, sustainable way.”