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“Fair tax” legislation would replace income, sales tax with consumption tax

Evan Mealins

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Alabama Rep. Mike Holmes, R-Wetumpka, prefiled “fair tax” legislation for the 2020 regular session that replaces state income and sales taxes with a statewide consumption tax. 

The legislation, called the Alabama Economic Freedom Act, would create a uniform 8.03 percent tax on all purchases of goods and services in the state. The tax is designed to generate the same amount of revenue for the state as the traditional income and sales tax system.

An automatic rebate given at the beginning of the month, called a “prebate,” would offset the price of the tax for Alabama citizens living at or below the poverty line to prevent causing unreasonable economic harm to low-income residents.

The Income Tax Division of the Alabama Department of Revenue would be rendered obsolete and the collection of the consumption tax would be redirected to the Sales Tax Division.

Holmes said the current system picks winners and losers through a “never-ending maze of tax exemptions, deductions, and credits” in a release. The system proposed in the legislation is simple and one people can understand, he claimed.

How a fair tax works

Proposals to improve the current tax system are varying and numerous.

Legislation prefiled by Holmes typifies the fair tax plan; its writing was based on the Fair Tax Act, a bill that has been introduced in Washington in every session since 1999.

The federal version of the plan would completely eliminate the income tax, but Holmes’s state-level plan would eliminate both corporate and individual state income taxes as well as repeal state, county and municipal sales taxes. The plan would replace those taxes with a statewide tax based on consumption — a consumption tax — at 8.03 percent, levied at the point of sale of all goods and services purchased in the state. Intermediate sales between businesses would not be taxed, nor are used goods or any savings, investment or education tuition expenses. 

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The plan is also supposed to be revenue-neutral, meaning that — if everything was to go as planned — the consumption tax would generate the same amount of revenue for the state as the traditional income and sales tax system.

Eliminating income tax and sales tax, which together bring in 86 percent of the state’s revenue, would leave a gaping hole in the budget for the consumption tax to fill. In fact, research from The Beacon Hill Institute predicted that to be revenue-neutral in 2019, the consumption tax would have to bring in $12.28 billion. How would the tax system under this proposed legislation bring in all that money? 

By taxing more things you buy. At first, the consumption tax may seem like a normal sales tax. But the plan would fail to be revenue neutral if all it did was institute a statewide 8 percent sales tax. So, the consumption tax would be levied on nearly all purchases, including previous purchases free from sales tax: gasoline, new houses, services like plumbing or freelance writing, etc. In 2017, purchases in Alabama subject to the consumption tax totaled 84.2 percent of total gross domestic product, according to The Beacon Hill Institute’s study. Using a little bit of algebra, they discovered that the tax rate would have to be 8.03 percent to raise $12.28 billion.

As the state collects the consumption tax, some of those funds would have to be redistributed to the counties and cities whose sales taxes would be repealed under the act. Of the share of funds earmarked for counties and cities, 60 percent would go to cities and 40 percent would go to counties, portioned out based on population.

A provision in the legislation ensures that low-income Alabama citizens would not be a victim of the tax.

An automatic rebate, called a “prebate,” would be available to all legal U.S. and Alabama residents to offset the cost of the consumption tax. For all legal households, a check would come in the mail at the beginning of the month for 8.03 percent of what the Department of Health and Human Services deems poverty level monthly wages for the family size of the household. This amount is what the household could be expected to pay in consumption tax, were it consuming goods and services at the federal poverty line. Under this proposed system, low-income Alabamians would be freed from taxes on purchases, unlike the current tax system.

So if, on average, each Alabamian would still pay the same amount of taxes, what would be the positive effects of the Alabama Economic Freedom Act becoming law? Alabama Director of Americans for Free Taxation Chuck Bailey, who assisted in the legislation’s drafting, spoke with the Alabama Political Reporter on Monday to offer some insight. 

Regarding the impact of eliminating taxes on intermediate sales and corporate income, Bailey said, “Why not just keep all those taxes from being accumulated from business to business as the product is being made or the service is being performed, and just place it where it’s really supposed to be: when the individual purchases it for his own individual use?” Fair tax proponents hope that removing those taxes on businesses would lower the price of goods and services to the consumer.

Bailey is part of a group of activists vying for fair tax to gather more national momentum. To do that, he said, is the reason the plan was brought to the state level; if the plan is successfully put in place in, say, Alabama or Georgia, politicians will feel more comfortable considering the Fair Tax Act, he hopes.

Bailey also pointed out the amount that tourists will be able to contribute to the tax base in Alabama. 

One possible loophole is the ability for Alabama residents who live near the state border to go to the nearest state to buy their groceries or gas or anything, and essentially be exempt from paying the state consumption tax. No proponent of the act was given a chance to comment on this to the Alabama Political Reporter, however. 

The act would also render the Income Tax Division of the Alabama Department of Revenue obsolete. The sales tax division would now be redirected to collect the consumption tax.

The Legislature will reconvene in February. 

Correction July 23: A previous version of this article incorrectly stated that the prebate was available only to households at or below the poverty line. The prebate is based on family size, not income. We regret this error.

 

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House

Alabama Legislature plans to return to work briefly March 31

Eddie Burkhalter

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The Alabama Senate is planning to get to only a few big, constitutionally mandated items before calling an end to the year’s legislative session amid the COVID-19 pandemic, but whether they’ll get those tasks accomplished remains to be seen. 

Senate leadership is advising lawmakers who fall into “at-risk” categories because of their age or pre-existing medical conditions to not attend the Senate’s meeting when it resumes.

Among the items legislators tentatively plan to tackle before gaveling the session closed sometime in the future are the passage of the Education Trust Fund budget and the General Fund budget, which is the Legislature’s only constitutionally mandated duty.

And “other bills deemed necessary.” 

The state Senate’s Plan of Action, obtained by APR Friday, states that the Senate will meet at 2 p.m. on March 31 for its 14th legislative day. 

“The intent for this legislative day is to advance only essential attendance items and then to adjourn to a date certain for the 15th Legislative Day. April 28 has been discussed with the House,” the plan reads. 

The State Senate’s plan: 

“As leaders, it is imperative that we demonstrate that the business of this state carries on in an orderly and systematic fashion while adhering to the recommendations of our public health officials.

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The Alabama Senate will meet on Tuesday, March 31 at 2:00 pm at the Statehouse in the Senate Chamber as scheduled. This will be the 14th Legislative Day.

The intent for this legislative day is to advance only essential attendance items and then to adjourn to a date certain for the 15th Legislative Day. April 28 has been discussed with the House.

Below is a draft agenda for Tuesday, March 31.

  • Gavel In
  • Pledge and Prayer
  • Roll Call
  • Excuse all Senators
  • Points of Personal Privilege
  • President Pro Tem Marsh
  • Majority Leader Reed
  • Minority Leader Singleton
  • Adjourn to date certain for 15th Legislative Day.

“It is highly recommended that any Senator that falls into any of the at-risk categories stay away from the March 31 Legislative Day,” the plan advises. “However, each Senator’s personal wish will be accommodated.”

Any Senator or staff member that is ill, has been ill, or has been in the same room of anyone that has had any symptom of illness in the 72 hours preceding the March 31 Legislative Day must stay away from the March 31 Legislative Day, according to the Senate’s leadership.

A disinfecting station will be provided under the canopy of the second-floor rear entrance for each senator to disinfect hands and cell phones as they enter the State House and as they leave the Statehouse.

“We must ensure that we practice all Health Department recommendations while at the Statehouse,” the plan reads.

Social distancing will be accomplished by having senators report to their offices by 1:45 p.m. They will then walk into the chamber as the roll is called and then go back to their offices.

“As much separation as possible is required therefore greetings must be verbal only from a distance of 6 feet or greater,” the plan reads.

The remainder of the session will be held possibly Tuesday, April 28 through Monday, May 18.

This timeframe includes three weeks of the session plus the last day of May 18.

A specific plan for meeting more days than normal will be developed and provided prior to the next legislative meeting date.

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House

$200,000 in campaign finance penalties deposited into State General Fund

Staff

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Act 2015-495, which went into effect beginning with the 2018 Election Cycle, allows the Secretary of State’s Office to issue penalties to Political Action Committees (PACs) and Principal Campaign Committees (PCCs) that fail to timely file campaign finance reports.

As of today, the Office of the Secretary of State has collected $202,504.20 which has been deposited into the State General Fund to benefit the people of Alabama.

Conversations with the Senate and House General Fund Chairmen are currently underway to determine the best way to allocate these resources to counties.

Anyone who receives a campaign finance penalty is able to appeal their penalty to the Alabama Ethics Commission who has the authority to overturn a penalty.

“When I campaigned for this office in 2014, I made a promise to the people of Alabama that I would work to see that it is easy to vote and hard to cheat in this state. Since then, we have worked to make the electoral process more fair and transparent through requiring the honest reporting of all PACs and PCCs,” stated Secretary of State John H. Merrill.

Anyone who suspects an individual may be in violation of the Alabama Election Fairness Project is encouraged to report suspicious activity to StopVoterFraudNow.com.

 

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Economy

Daniels: We have to get help to those who need it most

Josh Moon

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There is not enough help coming fast enough to the people struggling the most. 

That was the message from Alabama House Minority Leader Anthony Daniels, who was asked on the “Alabama Politics This Week” podcast about the efforts of Alabama’s state government to address the COVID-19 pandemic. 

“If you’ve never been poor, you don’t fully comprehend how things like this affect the poor and the unique problems the poor people face,” Daniels said. “I commend Gov. (Kay) Ivey and her staff for working to try and address this crisis the best they can, but I just think there’s a lack of understanding among all of us in some cases of how people need help.” 

To address those issues, at least in part, Daniels is writing a series of letters to different entities, including Ivey, to explain how they can best help the state’s most vulnerable. 

Daniels plans to ask the Alabama Supreme Court to order lower courts to halt foreclosure proceedings and evictions for those affected by coronavirus job losses and illnesses. He also will ask Ivey to intervene with banks on behalf of customers who are falling hopelessly behind on mortgage, car loans and other installment loans. And he will seek additional assistance from the state for borrowers with overwhelming student loan debt. 

“I want people to understand that I’m not criticizing what’s being done or trying to take control, I just hear from these folks on a daily basis and believe there are some better ways to help people,” Daniels said. “President Trump has addressed student loan debt by knocking the interest of those loans, but what does that really do for a person who just lost a job? Or someone who’s had hours and pay cut? We need to pause those payments and give people substantial forgiveness. 

“Otherwise, it’s going to be ugly.”

Democrats in the House also have been putting together potential legislation that could be passed to help the state’s poorest citizens and those who have been laid off from jobs. The specifics of those pieces of legislation weren’t available, but Daniels said they would have the same focus — providing real help for those who need it most. 

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If those bills are anything like the measures taken during the last economic downturn, you can expect a relaxing of rules on social programs, such as the Supplemental Nutrition Assistance Program and unemployment assistance programs. 

One of the first moves could be overturning a measure passed during the last legislative session that cut the number of weeks of unemployment pay in the state from 26 to 14. State Sen. Arthur Orr sponsored that legislation, and critics argued at the time that a downturn, such as the one that occurred in 2008, could suddenly leave thousands in the state without jobs and job prospects. It passed anyway.

 

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House

Alabama House cancels March 25 committee meetings due to coronavirus

Jessa Reid Bolling

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The Alabama House of Representatives announced on Monday that committee meetings scheduled for Wednesday, March 25 will be cancelled due to the coronavirus (COVID-19) outbreak.

The legislative day on March 26 has not technically been cancelled but the House is not expected to have a quorum for that day.

A “quorum” is the minimum number of House members that must be present at any meeting to make the proceedings of that meeting valid. If there are not enough members present, then the meeting cannot proceed and House rules state that the speaker of the House is allowed to set a new date for the meeting. 

The Legislature is currently on an annual spring break. The House and Senate are both expected to reconvene on March 31. According to the statement from the House, a joint decision will be made regarding the future legislative meeting days.

The full statement reads:

“The leadership of the Alabama House of Representatives has made several changes to the upcoming meeting calendar because of the coronavirus crisis in the state.

House committees that were scheduled to meet on Wednesday, March 25, 2020 have been cancelled.

The House is scheduled to meet on Thursday, March 26, 2020 at 9:30 a.m. but no quorum is expected that day.

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Under House Rule 5(b), if there’s no quorum to conduct business during a state of emergency declared by the governor, the speaker of the House is allowed to set the date and time of the next meeting day. 

Both the House and Senate will reconvene on Tuesday, March 31, 2020 and at that time a joint decision will be made as to future legislative meeting days.”

 

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