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As lawmakers consider new gas tax, Alabama remains last in per capita state, local tax collection

Chip Brownlee

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As state lawmakers prepare to consider a gas tax increase during the next legislative session, a new report from the Public Affairs Research Council shows Alabama’s state and local governments collect less in taxes per capita than any other state in the country.

Alabama has been behind in tax collection since the early 1990s, according to the Public Affairs Research Council of Alabama, which has produced an analysis of Alabama’s tax revenues since 1988.

“This is not a new finding,” the PARCA report says. “This has been true since the early the 1990s. And it underlies the difficulties we face when trying to provide to our citizens the level of government services enjoyed by citizens in other states.”

Lawmakers have flirted with a gas tax increase in recent years, and proponents say it is imperative to raise revenues to invest in Alabama’s aging infrastructure.

In Alabama, the gas tax hasn’t been increased since 1992, when lawmakers added 5 cents to the gallon, and the state ranks 35th in per capita state and local collections on motor fuel.

Several neighboring states have increased their motor fuels taxes in recent years, leading to Alabama’s rank declining relative to other Southeastern states. In 2016, only South Carolina collected less in motor fuels taxes, but South Carolina will likely surpass Alabama in the next few years because it adopted a plan recently to gradually increase its gas tax, and its rate now exceeds Alabama’s.

It isn’t just the gas tax that hasn’t really been adjusted in years.

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Alabama’s low taxes — while they may be a positive for your pocketbook — are often the single largest contributor to near-perpetual budget crises in Montgomery, placing a significant barrier for lawmakers as they balance the two state budgets every year. It’s a constitutionally mandated requirement.

While budgeting over the last two years in Alabama has been a smoother process — largely because the state has had billions on hand from a settlement with BP Oil over the 2011 Deepwater Horizon oil spill —Alabama is expected to face another budget shortfall this year.

The last major budget shortfall in 2015 led to an increase of some taxes, including the cigarette tax and taxes on nursing home beds — but property and income taxes haven’t moved much in years. Alabama’s extremely low property taxes are the main reason tax collections fall below other states.

If Alabama’s per capita property tax collections matched the average of other Southeastern states, state and local governments would have an additional $2 billion — yes, billion with a “b” — to spend on services and education, and the overall tax revenue per capita would be in the middle of other Southern states.

Though Alabamians are some of the most averse to taxes, the meager tax collections result in a strained pool of money for popular public services like schools, roads, courts, health care and public safety.

While Alabama has avoided passing general tax increases, it has turned to selective sales taxes. Alabama ranks high in per capita collections on alcoholic drinks (No. 3 in the U.S.) and on public utilities (No. 5) in the U.S.

PARCA conducted the analysis of Alabama’s tax revenues by relying on the U.S. Census Bureau and its annual survey of state and local governments across the country. The Census Bureau data makes it possible to compare the finances of state and local governments across the 50 states.

This year’s data is from 2016, the latest available, and tax rates haven’t changed much at all since then.

State and local spending are considered together because states vary in how they decide to divide up the taxation and collection responsibilities for funding public services and government.

Alabama has the lowest property taxes, both state and local, in the country, ranking 50th of the states. Alabama’s property taxes fund education, state and county general funds and county road and bridge funds.

The base of wealth in Alabama is also smaller than most other states, which also contributes to lower taxes. In Alabama, taxes amount to 8.2 percent of the total personal income earned by state residents, when comparing total personal income to total state and local taxes collected. Tennessee and Florida have lower tax rates as a percentage of percental income, and Georgia and Florida have lower taxes as a percentage of GDP.

Alabama and its local governments have developed a reliance on the sales tax and already has some of the highest sales tax rates in the country, ranking 29th in the U.S. And unlike other states, our sales tax applies to groceries and medications.

Sales taxes are often considered regressive because they more heavily affect low-income individuals than high-income individuals. Alabama is one of three states that continue to apply sales tax fully to groceries without providing offsetting relief for low- and moderate-income families.

At the same time, Alabama’s sales tax is not as broad as other states and doesn’t apply to most services. Despite higher taxes, Alabama’s sales tax isn’t as productive as other states.

Alabama sales tax applies to almost all sales of goods, but it does not apply the tax to most kinds of business, professional, computer, personal or repair services. And in recent years, the economy has moved more toward the consumption of those services, lessening the effectiveness of Alabama’s sales tax.

In 2016, the last year the Census Bureau performed its analysis, state and local governments collected a total of $15.6 billion in taxes or $3,203 per resident. Across the U.S., the median per capita value for state and local taxes was more than $1,281 higher at $4,484.

If Alabama collected taxes at the per capita rate of the median state, local and state governments in Alabama would have an additional $6.2 billion to spend on building roads, providing public safety protection, operating courts, supporting schools and colleges and maintaining parks and libraries.

Even if national comparisons are ignored, Alabama stands out among other Southern states when it comes to revenue.

Arkansas, North Carolina, Louisiana, Kentucky, Georgia, Mississippi, Florida, South Carolina and Tennessee all collect significantly more taxes per capita.

If Alabama collected taxes at the same rate as Louisiana, for example, the state would have about $3.2 billion more in tax revenue. If it collected the same amount of revenue as Arkansas, it would have $3.7 billion more.

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The full report is available here.

 

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