Recently, some Alabama state lawmakers claimed that because Alabama is one of the lowest tax burden states per capita in the country, it will be hard to pursue permanent tax relief in the upcoming legislative session, favoring one-time rebate checks instead.
But recent reports from the Tax Foundation, an independent nonprofit tax policy organization, paint a different picture of the overall tax burden placed on citizens and Alabama’s business owners. The bottom line remains that lawmakers should use a portion of the state’s historic $3 billion revenue surplus to provide permanent tax relief to Alabamians.
The problem with many of the per capita tax ratings touted by legislators is that they primarily factor in state individual income taxes, state property taxes, and only the state portion of sales taxes. This provides an incomplete view of Alabamians’ overall tax burden.
Take sales tax, for example. Alabama levies a state general sales tax of 4% on most purchases, the 11th lowest in the nation. When combined with the average local sales tax rate of 5.25%, however, Alabama has the fourth highest sales tax rate in the country at 9.25%, the Tax Foundation reports. Higher than states such as California, New York and Washington.
The only southeastern states with higher combined state and local tax rates are Tennessee, Arkansas and Louisiana. Tennessee is tied for the highest combined sales tax rate in the region, but it is important to remember that the state does not assess an income tax. Neither does Florida, whose combined sales tax rate is nearly 2.25% lower than Alabama’s. None of those states fully tax the sale of groceries.
Those figures also do not account for Alabama’s 8% online sales tax, which has boomed in recent years. Until the end of 2015, merchants did not collect the tax. Gross collections in 2021, divided 50-50 between state and local governments, totaled more than $521 million.
When it comes to individual income tax rates, Alabama is currently middle of the road compared to other southern states. That is changing, however.
As of Jan. 3, 2023, Georgia and South Carolina had higher income tax rates than Alabama, while Mississippi had the same 5% top marginal state tax rate. Five other southern states had rates ranging from 0.75% to 0.05% lower than Alabama. As already mentioned, Tennessee and Florida do not collect individual income taxes.
Georgia, Mississippi and Missouri have each enacted laws that will reduce the states’ top individual income tax rates to lower than Alabama’s over the next few years. Despite enacting the largest income tax cut in state history last year, Mississippi Gov. Tate Reeves (R) pledged to seek a complete elimination of the tax in 2023.
Over the past two years, 21 states have cut income tax rates. At least 12 states are considering them in 2023. Eight of those will be doing so for the second time.
Why are they continuing to pursue further rate reductions? Because tax revenues are expected to be over 9% higher than before the pandemic, a similar situation to Alabama. So why aren’t lawmakers talking about lowering income tax rates here?
The overall tax burden is also impacted by Alabama’s corporate tax structure. According to a separate report from the Tax Foundation detailing state business tax climates, Alabama ranks 41st in the nation, well below Florida, Tennessee, Mississippi, and Georgia. The report points to both sales and income tax rates as reasons for Alabama’s lower overall ranking.
Thus, to say that Alabama is one of the lowest per capita tax burden states in the nation is only true when looking at the issue through the narrowest of lenses. Citizens should not accept this notion and allow it to be justification for not pursuing permanent tax relief.
The fact remains that Alabama’s government is sitting on a $3 billion surplus financed by all Alabamians. While so many state legislatures around the nation find themselves in a similar situation and recognize that this is the peoples’ money, not government’s, too many Alabama lawmakers think the opposite.
The 2023 legislative session is an opportunity to provide historic tax relief to citizens, whether through eliminating the grocery sales tax, adjusting individual and/or corporate income tax rates, or finding additional ways to reduce the tax burden of Alabama’s job creators. If lawmakers pursue this vision, Alabama could actually be the lowest taxed state in the country.
Justin Bogie serves as Fiscal and Budget Reporter for 1819 News. The views and opinions expressed here are those of the author and do not necessarily reflect the policy or position of 1819 News. To comment, please send an email with your name and contact information to: Commentary@1819News.com.
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