Last week the legislature began touting the fact that lawmakers expect to pass $100 million in targeted tax cuts this session. Combined with a plan to ensure that American Rescue Plan Act (ARPA) tax credits aren’t taxed by the state, total relief would be pushed to just under $200 million.
Building the proposed tax cuts up as a major victory for Alabamians is disingenuous at best. The state brought in $1.5 billion in new revenues last year. That means that on top of record spending in 2021 - nearly $10 billion - government still took $1.5 billion more than it “needed” from your wallet. If all these targeted tax cuts become law, citizens will see a fraction of the revenue surplus returned to them, while the other $1.3 billion goes towards another year of record spending.
Hats off to lawmakers for doing anything to reduce the tax burden of citizens though. It’s surely better than doing nothing or further increasing taxes. Don’t forget that the legislature and Governor Ivey approved a $.10 gas tax increase, which can automatically increase by $.01 every two years, just three years ago.
Yet plans to enact more meaningful reforms haven’t left the legislative starting gate. A bill to repeal Alabama’s state sales tax on groceries, saving citizens over half a billion dollars, has not received a committee hearing. The personal and corporate income tax rate cuts implemented by 13 other states in the past year aren’t being talked about in Montgomery.
So, in the coming months as campaign season kicks into high gear and legislators tell you how they’ve helped you by cutting taxes, take it with a grain of salt. It’s technically correct, but it represents a missed opportunity to do much more.
The largest single tax “cut” passed by the legislature this session is House Bill 231 by Jim Carns (R-Vestavia Hills), which would ensure certain federal benefits are not taxed and save citizens about $87 million on their 2021 tax returns. Senator Dan Roberts (R-Mountain Brook) carried the Senate version of the bill and tried to get it passed during the special session earlier this year.
As part of ARPA, the federal government provided enhanced child tax credits, dependent care credits, and modified and increased the federal earned income tax credit. If current law had gone unchanged it could have meant that Alabama tax filers had less federal taxes paid to deduct from their Alabama state returns. Only those who were eligible for the enhanced federal benefit will be impacted by the bill, which amounts to about $90 in savings per child.
Rep. Carns and Senator Roberts should be applauded for making sure that these enhanced federal benefits do not translate to higher state taxes for Alabamians. But citizens should not have been on the hook for it anyway. It was never the state’s money to tax and represents no revenue loss for state government.
The next largest tax cut bill moving through the legislature is Senate Bill 18 by Arthur Orr (R-Decatur). The bill would exempt some distributions from defined contribution deferred compensation plans from state income tax. According to the Department of Revenue, the bill could save taxpayers as much as $74 million annually by 2026. However, the tax cut would only benefit those 65 and older.
House Bill 82 by Representative Danny Garrett R-Trussville passed both the House and Senate unanimously. The bill would exempt the first $40,000 in personal business property from taxation, providing some relief to businesses still recovering from the pandemic. However, the total tax cut is only about $4.3 million, meaning most eligible business owners might see their tax bill reduced by a few hundred dollars. Combining the personal property tax exemption with eliminating the state’s business privilege tax would have had a greater impact on Alabama’s business community.
Targeted tax cuts are better than no tax cuts, but $200 million of a $1.5 billion revenue surplus is not enough. Lawmakers should look for ways to help a larger portion of Alabamians.
Two obvious choices are the previously mentioned state sales tax on groceries and gasoline taxes. Anyone who buys food would see immediate savings and it would offset some of the increases in food costs that are straining family budgets. Repealing or at least freezing the 2019 gas tax increase would also provide immediate relief to many Alabamians, and with more federal transportation funding than ever flowing into the state, it would not adversely impact the state’s transportation budget.
Our neighbors in Mississippi are using the current legislative session to work towards repealing the state’s personal income tax and reducing the sales tax on groceries, using the government’s record surplus to take thousands of dollars less from each citizen annually.
While targeted tax cuts aren’t bad in and of themselves, Alabama lawmakers must think bigger and bolder and provide much-needed relief for all Alabamians, not just a selected few.
Justin Bogie serves as Senior Director of Fiscal Policy at the Alabama Policy Institute. 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: [email protected].