The Alabama Constitution and the taxation stool
Following is the seventh in a series of columns by members of the Alabama Citizens for Constitutional Reform.
By George Petty
The basic concept of a state's taxation of its citizens can be illustrated with a three legged stool with the three legs represented by income, sales and property tax revenue.
Income taxes at the federal and state levels are generally applied in a manner to alleviate the burden of these taxes on those with low incomes. The major ways are to allow exemptions for dependents, exclude a certain amount of income from taxes and to increase tax rates as income increases.
In Alabama, tax exemptions for a family of four are about one third of that for federal returns and substantially lower than most other states with income taxes. There is only one tax rate in Alabama compared to six at the federal level and two or more in many states with income taxes. As a result, Alabama families begin paying income taxes with incomes as low as $4,600 compared to more than $40,000 for federal returns. Even Mississippi excludes taxes on income below $19,600.
Alabama is also fairly unique among states with income taxes in that it allows individuals to deduct all of their federal income taxes on their state return, one of only six states to do so. This deduction favors higher income families and results in substantial lost revenue for Alabama every year.
Sales taxes, depending on the tax rate and what items they are levied on, can be very regressive in that they represent a larger percentage of a low-income family's earnings. In Alabama, unlike many other states, sales taxes apply on all purchases of goods including all food and prescription drug items. Sales-tax rates vary by localities but generally are high compared to other states, exceeding 10 percent in some areas. Sales taxes account for more than 50 percent of Alabama's tax revenues compared to about one third for all states.
Property taxes in most states are the main revenue source used to support education, since they are more immune to business cycles than income and sales taxes. Of the three major tax revenue sources, property taxes are the least regressive because wealthier families tend to own the most property.
Alabama has by far the lowest per-capita property taxes in the nation. They are one third of the average for all the states and less than one half of the average for the Southeastern states. In addition, a lower percentage of some classes of property are taxed, like timber. This approach further favors large timber and other land owners. In Alabama, sales and income taxes are primarily used to support public schools. Since these tax sources vary with economic cycles, there is a feast or famine aspect to these taxes, which has resulted in pro ration of school budgets every two to four years.
The amount of taxes collected by the state, divided by the number of residents, results in a tax revenue per person or per capita number which can be compared to other states. This number, in effect, measures the height of our tax stool.
Since the early '90s, Alabama's tax collections on a per capita basis have been lower than any other state and only two thirds of the national average. In other words, Alabama is trying to do what other states do with one third fewer resources. Thus, Alabama's tax approach has resulted in a very short and very lopsided tax stool.
Many of the reasons for the unusual tax structure and low per capita tax revenue number can be traced back to the 1901 Constitution. The framers of the Constitution embedded most of the tax structure for income and property taxes into the Constitution, making it a legislative document as well as a constitution.
The framers, primarily industrial barons and large landowners, then devised a long and tortuous path to make changes in the Constitution which in large part have made it difficult for the Legislature and local governments to perform their functions.