Are Alabama’s state revenue streams too ‘wild’ to enact permanent tax cuts?

The question of what to do with Alabama’s $3 billion revenue surplus continues as the 2023 Alabama legislature regular session approaches.

Rep. Danny Garrett (R-Trussville), the Chairman of the House Ways and Means Education Committee, discussed the prospects of permanent tax cuts vs. tax rebates on Alabama Public Television’s “Capitol Journal” last week.

Like other lawmakers weighing in on the issue, Garrett thinks lawmakers will eventually “do a rebate of some size.” But he also cautioned about the pushback over implementing a rebate versus putting all the money back into state government.

Garrett pointed to Alabama’s tax structure as the main reason lawmakers are hesitant to pursue permanent changes to the tax code. “Most states are dependent more on property taxes, which tend to be very stable,” he said. “Sales and income taxes fluctuate wildly. When the money is coming in, they go up. When the money is not there, they drop. So we’re looking at all of that and a very disciplined approach.” Garrett also said that per capita, Alabamians are the lowest taxed citizens in the country.

Rankings like this are highly subjective. U.S. Census Bureau data from 2021 ranked Alabama with the 10th lowest taxes per capita. The same year, using 2018 fiscal year data, the Tax Foundation ranked Alabama as having the second lowest tax burden in the U.S., at $3,527 per person.

However, the Tax Foundation ranks Alabama 41st when it comes to state business tax climates, ranking 50th in sales tax and 30th for individual income taxes. Alabama’s tax system hampers “economic growth by including too many business inputs, excluding too many consumer goods and services, and imposing excessive rates of excise taxation,” the report said.

There are structural changes to the tax code that could be made to allow citizens to take home more of their earnings and improve the tax environment for Alabama businesses.

To his credit, Garrett is open to permanent tax changes, even though he feels they will be challenging to enact, noting, “I think tax reform is something we should discuss but permanent tax cuts, we’ve got to be careful because we’re dependent heavily, unlike most states, on income and sales tax.” Garrett has supported structural tax code changes in the past, including during the 2020 regular session, when he and Sen. Dan Roberts (R-Mountain Brook) cosponsored a bill to reduce the state’s corporate income tax and untie state tax payments from the federal tax code.

While it is true that Alabama’s Education Trust Fund budget relies heavily on income and sales tax collections, those revenues have steadily increased over the past few years and continue to do so in the first quarter of 2023. Individual income and corporate income tax receipts grew by an annual average of 18.9% and 28.2% respectively from 2018-2022, data from the Legislative Services Agency and shows. Sales tax receipts grew at a more modest rate of 6.7% but outpaced average inflation over the five-year period.

Individual and corporate income tax receipts were up 12.2% and 15.7% in the first quarter of fiscal year 2023 compared to the same period last year. Sales tax growth slowed but was still 3.4% ahead of the first quarter of 2022.

In the State General Fund, gross collections of the state’s online sales tax, which are divided evenly between state and local government, ballooned from approximately $80 million in 2018 to over $600 million in 2022. They continued to grow by 22.8% though the first quarter of this year.

Should we expect the state’s primary revenue sources to continue to grow at these elevated rates? No, but economists from the University of Alabama predict that the state’s economy will shrink only slightly in 2023, adding that “even if we go into a recession, it is only expected to be a mild one.”

Alabama’s state government is collecting more revenue than at any point in state history. While the economy may slow down this year, a major downturn is not expected. If lawmakers fear that the current state tax structure is weighted too heavily towards volatile revenue streams, Republicans hold a supermajority in the legislature as well as all statewide elected offices and could change it.

There is enough money available to provide Alabamians with historic tax relief, without jeopardizing future state budgets. The question is, are lawmakers willing to do so?  

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