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Tax Revenue Issues in Alabama for 2015

Dr. Ira W. Harvey

The University of Alabama

January 15, 2015

2Walt Kelly: The Pogo Papers

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If “We have met the enemy and he is us,” how did we obtain “enemy” status?

Walt Kelly: The Pogo Papers

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Names (Euphemisms) For The Civil War

The Late Unpleasantness

The War of Northern Aggression

The Lost Cause

The War Between the States

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Reconstruction:• The excesses of taxation, spending, and

debt during Reconstruction (Constitution of 1868) created a demand for a new constitution in 1875.

• This new constitution would enroll restrictions on taxation and debt that would be carried forward into our present Constitution of 1901.

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The Constitution of 1875Conservative government returned to the State of Alabama in

1875 with a new constitution. Taxation was limited, expenditures were reduced, and state government attempted to settle the debt that had resulted from the period of Reconstruction. The state had been bankrupt since 1872, and the excesses of Reconstruction paved the way for return of power to the white population. The "Conservative Constitution" of 1875 also provided a modern mandate for Alabama's public school system: 

“The General Assembly shall establish, organize, and maintain a system of public schools throughout the State, for the equal benefit of the children thereof between the ages of seven and twenty-one years; but separate schools shall be provided for the children of citizens of African descent (Constitution of 1875, Article XIII, Sec. 1).”

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Alabama’s Tax Structure, 2015

By placing constitutional limits on taxation of wealth and income in the Constitution of 1901, the revenue problems created for state and local government peaked in 1969.

State leaders wanted modern improvements in infrastructure and education.

The only path for new revenues was that which was not prohibited by the Constitution of 1901. This path was statutorily implemented by the Legislature.

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Real Property Sales and Use TaxesTangible Personal Property Occupational Tax Personal Income TaxIntangible Personal Property Business License Taxes Corporate Income TaxInheritance/Estate Tax Regulatory Taxes

Base to be Taxed Base to be Taxed Base to be TaxedExemptions From Tax Exemptions From Tax Exemptions From TaxAssessment of Value Purpose of Taxation Assessment of ValueRate of Taxation Permitted Rate of Taxation Permitted Rate of Taxation PermittedDistribution of Proceeds Distribution of Proceeds Distribution of Proceeds

Level of Government Levying:

State & Local State & LocalConstitutionally Defined:

Statutorily Defined: Constitutionally Defined:

State Only

Income Taxes:

TYPES OF TAXES

III. IncomeI. WealthAd Valorem Tax on Property:

II. TransactionExcise, Franchise & Privilege License Taxes:

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Does Alabama’s Aversion to Taxation Have Negative

Consequences?

“I like to pay taxes. With them, I buy civilization.”

Oliver Wendell Holmes (1841-1935)

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STATE TOTAL TAXES POPULATIONTOTAL PER

CAPITA RANKPROPERTY

TAXES PROPERTY PER CAPITA RANK

US TOTAL 1,338,436,677$ 311,582,564 4,295.61$ N/A 443,259,172$ 1,422.61$ N/AAlabama 13,878,574$ 4,801,627 2,890.39$ 51 2,588,390$ 539.07$ 51

Alaska 7,292,155$ 723,375 10,080.74$ 1 1,492,499$ 2,063.24$ 9

Arizona 21,655,498$ 6,468,796 3,347.69$ 40 7,104,412$ 1,098.26$ 32

Arkansas 9,949,704$ 2,938,506 3,385.97$ 39 1,812,948$ 616.96$ 49

California 185,218,208$ 37,668,681 4,917.03$ 12 53,506,490$ 1,420.45$ 20

Colorado 21,791,868$ 5,118,400 4,257.55$ 20 8,320,119$ 1,625.53$ 14

Connecticut 22,762,680$ 3,588,948 6,342.44$ 6 9,229,775$ 2,571.72$ 3

Delaware 4,072,252$ 907,985 4,484.93$ 18 666,240$ 733.76$ 46

DC 5,368,803$ 619,624 8,664.61$ 2 1,757,196$ 2,835.91$ 2

Florida 65,259,273$ 19,083,482 3,419.67$ 38 25,934,924$ 1,359.02$ 24

Georgia 31,132,743$ 9,810,181 3,173.51$ 45 10,349,138$ 1,054.94$ 34

Hawaii 6,572,749$ 1,376,897 4,773.60$ 14 1,324,771$ 962.14$ 38

Idaho 4,711,409$ 1,583,930 2,974.51$ 49 1,367,956$ 863.65$ 41

Illinois 59,551,953$ 12,855,970 4,632.24$ 15 24,172,045$ 1,880.22$ 11

Indiana 23,152,483$ 6,516,336 3,552.99$ 33 6,313,350$ 968.85$ 37

Iowa 12,649,129$ 3,064,102 4,128.17$ 23 4,369,466$ 1,426.02$ 19

Kansas 11,756,882$ 2,869,548 4,097.12$ 24 3,915,805$ 1,364.61$ 23

Source: U.S. Census Bureau, 2011 Annual Surveys of State and Local Government Finances. Prepared by Ira W. Harvey, UA

Table 1. State and Local Government Finances by Level of Government and by State: 2010-11

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Tax Per Capita Rank

539.07$ 51827.61$ 31128.84$ 27

Alcoholic Beverage 41.45$ 434.24$ 40

172.36$ 5181.45$ 25605.01$ 3862.72$ 4245.92$ 43

251.73$ 182,890.39$ 51

Type of Tax

Public Utilities

PropertyGeneral SalesMotor Fuel

Tobacco

Other Selective Sales

Prepared by Ira W. Harvey, UA

Source: U.S. Census Bureau, 2011 Annual Surveys of State and Local Government Finances.

Alabama

Individual IncomeCorporate IncomeMotor Vehicle License

TOTAL TAXESOther Taxes

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Title of Earmarked Earmarked

Revenue To Education To GeneralSource Trust Fund Fund

SALES TAX: Motorboat Sales Tax 50.00% 50.00%Motor Vehicle Sales Tax 58.00% 42.00%

Sales Tax Discount Parks 0.00% 100.00%

Sales Tax Conservation 0.00% Amount

Human Resources 0.00% 5% Food Stamps

APSCA 0.00% 0.00%

County Payments 0.00% 0.00%

Tax Credits for AAA 0.00% 0.00%

General Sales Tax Residual Balance 0.00%

USE TAX:

Use Tax on Motor Vehicles 58.00% 42.00%Use Tax - Remote 25.00% 75.00%General Use Tax Residual 75.00% 25.00%

Statutory Earmarking of Sales/Use Taxes

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Is expanding the tax base and/or increasing the tax rate then applied defined as a tax increase?

Is expanding the tax base by removing tax exemptions, credits and abatements defined as a tax increase?

Enhancing State Revenues:

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• A tax expenditure program is government spending through the tax code. Tax expenditures alter the horizontal and vertical equity of the basic tax system by allowing exemptions, deductions, or credits to select groups or specific activities. This is a cost to state and local government revenues.

– In public finance horizontal equity is the idea that people with a similar ability to pay taxes should pay the same or similar amounts. It is related to the concept of tax neutrality or the idea that the tax system should not discriminate between similar things or people, or unduly distort behavior.

– Vertical equity usually refers to the idea that people with a greater ability to pay taxes should pay more. If the rich pay more in proportion to their income, this is known as a proportional tax; if they pay an increasing proportion, this is termed a progressive tax.

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1976 Nobel Prize winning University of Chicago economist

Milton Friedman and others

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Is Reversing Earmarking Easily Accomplished?

1. Total state revenues are not increased; therefore some programs would experience reductions.

2. Why was earmarking deemed important when it was implemented?

3. Are there any significant examples of current tax revenue earmarking leading to overfunding of programs?

4. And, Abramson v. Hard

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Public Education in Alabama is a non-essential function of state government.

Deficit spending cannot occur under the provisions of Amendment 26, Constitution of 1901.

Appropriations must be reduced pro rata when there is a revenue shortfall.

Essential functions must be paid in full; then non-essential functions suffer all shortfall by proration.

Education would suffer discriminatory proration as a part of the General Fund (GF).

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Is Public Education Overfunded in Alabama?

1. “Public” has been removed from our Constitution of 1901 (Amendment 111)

2. Exactly what items of appropriation are included in the published share for Higher Education, K-12, and Other (the split)?

3. Are there reputable national studies which have concluded Alabama spends too much on education?

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Grade F: States Trail in College Funding, Tuition - More than 30 states received an F for higher education spending per student.

Alabama continues trend, receives F for

higher education spending. Birmingham

Business Journal,

Jan 7, 2015, 7:41am CST

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CONCLUSIONS?1. Does Alabama have a revenue problem?

2. Does Alabama have a spending problem?

3. In accordance with Amendment 26 (Warrant Amendment of 1933), how will the Governor submit and the Legislature approve balanced budgets? (Amendments 212 and 225 and §40-18-15)

4. Should Alabama totally unearmark all revenues?

5. Should Alabama only have a General Fund Budget?

6. How should Alabama evaluate adequacy of program funding for state purposes?

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Henry Louis Mencken