Alabama collects less per capita in taxes than almost any other state, but Alabamians pay more in state and local sales taxes than people in most other states, according to a new report.
The Public Affairs Research Council of Alabama’s How Alabama Taxes Compare, 2023 Edition report says:
- Alabama’s per capita property tax collections are the lowest in the nation. That’s good for home and property owners, “but creates a revenue deficit, leaving state and local governments with less to spend to provide government services such as education, health, and public safety.”
- Alabama’s state and local sales tax rates are among the highest in the U.S., compensating for low property taxes.
- Low-earning workers begin paying income taxes at a lower threshold than any other state. But Alabama is the only state that allows a full deduction for federal income taxes paid, a tax break that benefits high-income earners more, the report said.
“Most state and local tax revenue can be grouped into one of three categories: property taxes, sales taxes, and income taxes,” Ryan Hankins, the executive director for PARCA, said in a news release. “Ideally, the state would draw an equal amount from these sources, but that is not true in Alabama. Alabama has the country’s lowest per capita property tax collections; it starts taxing income earlier than every other state; and it has among the highest sales tax rates in the U.S. This means the state’s poorest residents shoulder a higher tax burden than their wealthy counterparts.”
The report relies on the most recent data, fiscal year 2020, from the U.S. Census Bureau’s Annual Survey of State and Local Finances.
That year, the state collected $4,237 per resident, $481 more than the year prior. Nationally, the median value was $5,385 per capita, $1,196 more per person than Alabama. Only Alaska collected less per person.
“Alabama’s tax and revenue collections were inflated in recent years due to the influx of federal stimulus funds and other resources meant to remediate COVID losses. These rates are not likely to be seen again,” said Thomas Spencer, PARCA’s senior research associate. “Our tax system is set up to produce lower tax revenues per capita than other states. As normal economic conditions return, the question remains: Will Alabama be able to collect enough funding to pay for the government services it has promised residents?”
There were some areas where Alabama collected more taxes per capita than most other states, including those on alcoholic beverages and public utilities.
The report also notes some recent tax cuts, including the 2022 change so that income tax isn’t collected until an individual earns $4,500 and this year’s reduction of the state sales tax on groceries, from 4% to 3%.
Still, no other states begin taxing income at a level as low as Alabama’s, PARCA said. And Alabamians pay the same 5% no matter how much they earn.
Some lawmakers have at times discussed changing some of the issues highlighted in the report.
Sen. Andrew Jones, R-Centre, a few years ago suggested eliminating the sales tax on groceries and replacing that revenue to the state by ending the federal income tax deduction on state taxes. That proposal didn’t advance and lawmakers this year approved a plan that didn’t replace the money lost by cutting the sales tax.
Jones and others have discussed how to further reduce or eliminate the remaining sales tax on groceries, but on Wednesday he said changes to the federal income tax deduction wouldn’t be part of any new proposals. The state could see another 1 percentage point decrease on groceries next year if state revenues grow.
“I believe that we can absorb the cost of the final 50% at a future date,” Jones said.
Also last year, Sen. Arthur Orr, R-Decatur, sponsored tax-cut bills to: Increase the income tax exemption for taxable retirement income from $6,000 to $10,000; eliminate the 2% income tax rate on the first $500 of taxable income; and reduce the 5% income tax rate gradually each year until it’s 4.95% in 2027.
Orr backed off those proposals when the sales tax cut and another bill to untax people’s overtime earnings gained momentum.
“It was too much — we couldn’t do it all,” Orr said on Wednesday.
Orr still likes those proposals and said he’s considering reintroducing them in the 2024 session. But he thinks there’s a better case to be made for another tax cut proposal he will bring next year to remove state and local sales taxes from menstrual hygiene products, baby wipes and diapers and other baby care products.
“It’s modest,” he said about the potential cut. State leaders are not expecting significant growth in the Education Trust Fund, where sales and income tax revenue goes. “We have to be careful not to overshoot the runway. As we have capacity, we need to remit, in permanent tax cuts, what we can back to the people, and run government, including educational institutions, efficiently.
“…There is still a lot of need in education.”
Sales tax revenues in the first two months of fiscal 2024 are down about 5% compared to the previous year. Revenues in total to the ETF are flat so far. That’s not a big concern because lawmakers planned to spend in 2024 less than the expected revenues.
“Targeted and manageable tax reductions are to be considered,” Orr said.
Another expected tax cut proposal will come from House Minority Leader Rep. Anthony Daniels, D-Huntsville, and Sen. Garlan Gudger, R-Cullman. They’ll again bring legislation to give a tax break to businesses that provide or help pay for employees’ child care.