Tax Justice Digest stories about Alabama

As we've discussed in recent digest articles, this year saw a flurry of activity in the debate over state deductions for federal income taxes paid. Presently, seven states (Alabama, Iowa, Louisiana, Missouri, Montana, North Dakota, and Oregon) offer state taxpayers some form of income tax deduction for the federal income taxes they pay.  This basically undoes, at least partially, the progressivity of the federal income tax. The upper-income taxpayers who pay more in federal income taxes receive the largest deductions on their state income taxes, even though they have the greater ability to pay. Proposals to reform the deduction for federal income taxes paid in Alabama and Iowa came up short this year, but state lawmakers are vowing to bring up the issue again next year.
 
Removing the sales tax on food and offsetting the revenue loss by phasing out the deduction for federal income taxes paid for wealthier Alabamians was the number one priority for Democratic lawmakers, but this week the House came up just one vote shy of the three-fifths needed to debate a bill before the state's budget passes. The bill's sponsor, Representative John Knight, has vowed to bring up the bill again next year and says, "I consider this an economic incentive package for working families of this state."
 
Lawmakers in Iowa proposed to completely eliminate the deduction and use the revenue generated to fund a reduction in state tax rates. The debate over the proposal was quite heated. According the Des Moines Register, "The debate included a rowdy public hearing where hundreds of Iowans -- most of whom opposed the plan -- were escorted from the House chambers by Iowa State Patrol troopers after they persisted in booing, hissing and applauding speakers." Despite support from the House Speaker Pat Murphy and Senate Majority Leader Michael Gronstal, the legislation didn't have enough support and ultimately wasn't debated in either the House or the Senate. Senator Gronstal is predicting that the legislation will be introduced again next year, saying, "There are times when issues are right but they're not ripe."
 
 

The Center on Budget and Policy Priorities recently released a very useful report summarizing tax expenditure reporting practices in the states, as well as methods for improving a typical state's tax expenditure report.  For those unfamiliar with the term, a "tax expenditure" is essentially a special tax break designed to encourage a particular activity or reward a particular group of taxpayers.  Although tax expenditures can in some cases be an effective means of accomplishing worthwhile goals, they are also frequently enacted only to satisfy a particular political constituency, or to allow policymakers to "take action" on an issue while simultaneously being able to reap the political benefits associated with cutting taxes.

Tax expenditure reports are the primary means by which states (and the federal government) keep track of these provisions.  Unfortunately, most if not all of these reports are plagued by a variety of inadequacies, such as failing to consider entire groups of tax expenditures, or not providing frequent and accurate revenue estimates for these often costly provisions.  Shockingly, the CBPP found that nine states publish no tax expenditure report at all.  Those nine states Alabama, Alaska, Georgia, Indiana, Nevada, New Jersey, New Mexico, South Dakota, and Wyoming, undoubtedly have the most work to do on this issue.  All states, however, have substantial room for improvement in their tax expenditure reporting practices.

For a brief overview of tax expenditure reports and the tax expenditure concept more generally, check out this ITEP Policy Brief.

At present, seven states (Alabama, Iowa, Louisiana, Missouri, Montana, North Dakota, and Oregon) offer state taxpayers some form of an income tax deduction for the federal income taxes they pay.  This basically undoes, at least partially, the progressivity of the federal income tax. The upper-income taxpayers who pay more in federal income taxes receive the largest deductions on their state income taxes, even though they still have the greater ability to pay.

 

Efforts to limit or to repeal these deductions -- and to use the additional revenue to provide tax reductions for low- and moderate-income taxpayers -- have been underway in two such states. In Alabama, Representative John Knight has proposed legislation to pare back his state's federal income tax deduction in order to finance a sales tax exemption for groceries. Unfortunately, House Republicans may have successfully prevented further consideration of the bill this session, voting en bloc to keep it from coming before the House for debate. 

Meanwhile, in
Iowa, momentum is building for a plan that would repeal the deduction outright while also lowering tax rates across the board and increasing a pair of tax credits.  House Speaker Pat Murphy recently voiced his support for the changes and the Senate seems poised to act as well.

 

For more on efforts in Alabama and Iowa to improve tax fairness, see the web sites for Alabama Arise and the Iowa Policy Project.

We've recently highlighted a variety of progressive revenue raising options gaining serious attention in New York and Wisconsin.  This week we bring you yet another idea that's recently been the subject of debate, though this one applies to fewer states.  Those seven states still offering income tax deductions for federal taxes paid (i.e. Alabama, Iowa, Missouri, Montana, North Dakota, Louisiana, and Oregon), should immediately repeal, or at the very least dramatically scale back, that deduction.

The federal income tax deduction takes what is perhaps the best attribute of the federal income tax -- its progressivity -- and uses it to stifle that very attribute at the state level.  Since wealthy taxpayers generally pay more in federal taxes than their less well-off counterparts, allowing taxpayers to deduct those taxes from their income for state income tax purposes is a gift to precisely those folks who need it least. And since most state income tax systems possess a degree of progressivity, those better-off taxpayers who face higher marginal tax rates are benefited even more by being able to shield their income from tax via this deduction.

Iowa Governor Chet Culver most recently drew attention to this problem while
urging lawmakers this week to end the deduction.  The idea has also recently garnered attention in Missouri, where ITEP recently testified on a bill that would, among other changes, eliminate the deduction.  Finally, another bill making its way through the Alabama legislature seeks to end the deduction for upper-income Alabamians.

With three of the seven states that still offer this deduction considering its elimination, this is definitely one progressive policy change to keep an eye on.

Despite their obvious unfairness, tax amnesties are a tool frequently used by states during tough budgetary times.  By waiving late fees and sometimes reducing the interest rate charged on overdue taxes, state policymakers can provide their state with a quick band-aid fix without having to make the much harder choice of raising taxes or cutting valued services.  But penalizing similar taxpayers at different rates dependent only upon whether they decide to pay up during an amnesty period is plainly unfair.  The problems associated with amnesties become even worse, however, as soon as a state establishes a habit of repeatedly offering amnesties during tough economic times.

With the possibility of another amnesty always on the horizon, delinquent taxpayers will think twice before settling their debts with the state during normal times, and at normal penalty rates.  Creating multiple sets of penalties (one for normal times, and one, lower penalty when budgets shortfalls are projected) therefore reduces fairness by penalizing similar taxpayers differently based only on the timing of their payment, and can also reduce the effectiveness of enforcement efforts and the tax system broadly.  These effects can continue long after the most recent amnesty period ends.  (Note that this is very similar to the argument against allowing corporations to "repatriate" their profits to the U.S. at a lower rate, a proposal which was recently rejected at the federal level).

Despite the obvious problems,
Maryland and New Mexico are both considering legislation to once again provide temporary tax amnesty programs some time in the coming months.  New Mexico last provided an amnesty less than a decade ago, while Maryland's last amnesty came in 2001.  After that 2001 amnesty, the Maryland comptroller's office noted that "repeated use of amnesties is likely to create cynicism among law-abiding taxpayers, and lessen the need for voluntary compliance with state tax laws, which is vital for our system of taxation".  Should another amnesty be offered less than a decade after the 2001 amnesty, growth in taxpayer cynicism seems unavoidable, especially in light of the fact that a similar program offered in 1987 in the state was billed as a "once-in-a-lifetime" opportunity for delinquent payers.

Without a doubt, the momentum in favor of such programs is strong.  Alabama is already in the mist of an
amnesty period (the state last offered an amnesty in 1984).  Massachusetts is currently in the process of deciding upon a date for its amnesty program (Massachusetts last provided amnesty in 2003).  Connecticut's program is already slated to take effect on May 1st (Connecticut's last amnesty took place in 2002).  And Oklahoma just recently closed its most recent amnesty period, just seven years after its 2002 amnesty.

In this environment, it is extremely important for state policymakers to not only oppose more amnesties, but also to convincingly state that another amnesty will not be offered any time in the near future.  For states looking to responsibly close their tax gaps, stepping-up enforcement spending is often a route that can produce sizeable returns, and is undoubtedly much more fair than trying to get something for nothing by arbitrarily waiving penalties in an effort to boost voluntary "compliance".  For more specific alternatives to the tax amnesty approach, take a look at these recent enforcement
recommendations from Oregon's Department of Revenue.

As we mentioned last week, this is the season for fiscally irresponsible sales tax holidays to purportedly give relief to working people on their back-to-school shopping. Sales tax holidays are a bad idea for the states' budgets and tax-payers alike. Low-income families probably cannot time their purchases to take advantage of a sales tax holiday, and it can be an administrative headache for retailers and government. Sales tax holidays are also poorly targeted to low-income individuals compared to other policy solutions such as low-income tax credits.

Now another group of states is ready to forgo needed tax revenue in exchange for a few dollars off the purchase price of various goods. These states include Alabama, Iowa, Missouri, North Carolina, Tennessee, and Virginia among others with holidays scheduled Friday through Sunday.

Meanwhile, a Birmingham News editorial points out that the sales tax holiday is a "gimmick" that has allowed state lawmakers to divert attention from their outrageously regressive tax code. Alabama is one of only two states that doesn't exempt or provide a low-income credit for its sales tax on groceries. If that were done, Alabama consumers would save far more money than they do on a three-day sales tax holiday (an average family of four would save about seven times as much). But instead of exempting groceries from sales taxes or raising the state's second-lowest in the nation income tax threshold, lawmakers pretend to help low-income Alabamians with a few tax-free shopping days a year.

Georgia's sales tax holiday began on Thursday and exempts articles of clothing costing less than $100, personal computers cheaper than $1500, and school supplies under $20. This week, the Atlanta Journal-Constitution mentioned some of the more amusing exemptions covered by that state's sales tax holiday. These exemptions include corsets, bow ties and bowling shoes. As the author noted, guys headed to their first day back in school "might combine the bow ties and bowling shoes, then just head straight for the restroom to collect their free swirlie." The article also mentions ski suits, highly unlikely to be big sellers in Georgia, and adult diapers, seemingly unrelated to the average family's back-to-school needs. Georgia lawmakers may want to revise their list of exemptions to concentrate on discounting necessities, or better yet, end this farce once and for all.

Progressives have long contested the unfairness of depending on local property taxes for school funding. Property taxes are fundamentally regressive and many localities do not even have the tax base to adequately fund their local school district. But for some jurisdictions the only alternative funding mechanism is sales taxes, which are even more regressive. That means that localities' ability to raise property taxes to fund education is particularly important. Thus, a new court case is challenging Alabama's ultra-low property tax caps which are rooted in the state's archaic 1901 Constitution. Read much more about the case and Alabama's deeply disturbing history of racially motivated tax discrimination on our blog here.
Alabama's House of Representatives passed a bill on Tuesday that would decouple the state tax rules regarding depreciation from the depreciation rules in the federal tax code. If enacted, this will prevent a revenue loss that will otherise occur because of the federal stimulus law enacted in February.

That stimulus bill included Congress's latest round of "accelerated depreciation" corporate tax cuts passed under the guise of helping the economy reboundIt allows companies to claim a "bonus" depreciation tax break that lets them deduct the cost of their investments much faster than would otherwise be allowed.

Since virtually every state's corporate tax laws are based on federal rules, this tax break will create an automatic tax loss for states unless (as Alabama is in the process of doing) they take steps to "decouple" from the federal tax break. The Alabama bill, HB 455, is estimated to save the state over $50 million in the current fiscal year. The Center on Budget and Policy Priorities reports that as many as 22 other states could take the same loophole-closing step to help shore up their corporate income tax base -- and their budgets.

The Alabama House of Representatives this week passed a constitutional amendment that would improve the state’s tax system in three very important ways.  Though the vote was contentious, with the amendment gaining only the bare number of votes needed to pass, each of the changes would result in a tax cut for the vast majority of Alabama families and would bring the state tax system closer in line with what most other states have been doing for years.

The centerpiece of the proposal is an elimination of the state’s regressive sales tax on groceries.  Alabama is currently one of only two states that provides no tax relief whatsoever for groceries, and a majority of states already exempt groceries completely from the sales tax.

Additional tax cuts would be given to almost all Alabama families by tying the state standard deduction to the larger, federal standard deduction.  The personal and dependent exemptions would also be increased, though they would not increase with inflation.  The most important impact of these changes would be a reduction or elimination of state income taxes for low-income families, but all Alabama families paying the income tax would see a benefit.

Revenue loss associated with these progressive cuts would be offset by ending the state’s rare and regressive state income tax deduction of federal income taxes paid.  The beneficiaries of the existing deduction are primarily those wealthier taxpayers who have the largest federal income tax liabilities.  Unfortunately, there are already rumblings that this change may have to be scaled back in order to get the amendment through the full legislature.  Instead of entirely repealing the deduction, it may be the case that the deduction is capped at some amount.  Though this would preserve the benefits of this proposal for middle-income taxpayers while eliminating huge tax cuts currently being handed to the rich, it would would produce only a fraction of the revenue generated by a full repeal.  Without the revenue created by a full repeal, ending the grocery tax and increasing the standard deduction and exemptions would be much more difficult.  Additionally, scaling back the deduction for federal income taxes paid may be seen by some as “enough,” and could serve to stall a needed repeal of the entire deduction in the future.

An additional problem for the amendment may be a dispute over whether it was fairly passed.  The Alabama legislature has a history of allowing other people to cast legislators’ votes for them when they cannot be in attendance.  In this instance, however, there was some question about whether legislators’ votes were cast in the opposite direction from what they intended.  One Democratic legislator admitted to voting in favor of the amendment on other legislators’ machines, though after this was discovered a motion to reconsider the bill failed and the passage of the amendment was not reversed.

Ideas are being floated in Alabama and Illinois to address the regressive nature or their tax structures. Proponents of a revenue-neutral plan that has gained some attention in Alabama claim that it would cut taxes or keep them at their current level for 80% of taxpayers, while increasing taxes on only the wealthiest 20% of payers. Since the Alabama tax system is incredibly regressive, this would be a very welcome change.

Under the proposed plan, the income tax would be made more progressive by increasing personal exemptions and standard deductions, at a cost of about $250 million per year. Additionally, the regressivity of the Alabama sales tax would be reduced by exempting groceries.  The grocery exemption would bring Alabama closer in line with the overwhelming majority of states, as Alabama is one of only two states that makes no effort to mitigate the regressive effects of the grocery tax. The $550 million price tag attached to these tax cuts would be paid for by eliminating Alabama's regressive tax deduction for federal income taxes paid. Only two other states allow for a full deduction of federal income taxes paid. Eliminating this deduction would increase taxes the most for those wealthiest Alabamians who have the highest federal income tax liabilities.

The reforms proposed in Illinois, and just recently approved by a Senate committee, would result in a net tax increase of about $3.8 billion to be used to fund education, early childhood programs, pensions, health care, and construction projects. Given that Illinois is projected to have budget deficits this year and for years to come, progressive tax increases seem like a very good idea. To ensure tax fairness, revenues would be raised by the most progressive tax available – the income tax.  The personal income tax rate would increase from 3% to 5%, and the corporate income tax rate would rise from 4.8% to 8%. Offsetting much of this tax increase would be property tax cuts (a minimum of 20% of the school portion of property tax bills) and income tax credits for low-income families.

Unfortunately, the governors in each of these states are opposed to the plans (primarily to the tax increases for wealthier taxpayers). This means that if tax reform is to occur in 2008, it could be much less progressive than what has been proposed thus far. It's certainly refreshing, however, to see state lawmakers discussing these kinds of relatively major tax overhauls with fairness considerations obviously on the top of their agendas.

 

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