Alabama Tax Revenues Remarkably Resilient in 2020

Tax revenue flowing into Alabama’s General Fund and Education Trust Fund held up surprisingly well in 2020 fiscal year in spite of the Coronavirus pandemic, thanks to an extremely strong state economy preceding the pandemic and a flood of federal aid that followed the pandemic’s arrival.

Remarkably, both Alabama’s General Fund and its ETF grew substantially in 2020, meeting and exceeding budget expectations. The ETF took in an additional $209 million in 2020 compared to 2019, a 3% increase. The General Fund received 7% or $147 million more in 2020 than it did in 2019.

How is that possible considering the spike in unemployment that began in March and still has not completely abated? What about the mandatory business closures in March and April and the restrictions still in place to protect against the spread of the Coronavirus?

Several factors combined to dampen the blow to tax revenues.   

  1. A very strong economy going into the pandemic. Unemployment was at a historic low between October and March. That makes up the first half of the fiscal year. Prior to the pandemic, income tax receipts were up around 7% over the same period in 2019. Collections dropped drastically but then began to recover. Taking the whole year into consideration, income tax collections were up 2.4%.
  2. Unprecedented levels of federal aid to businesses and individuals. into the economy. According to USASpending.gov, individuals and governments in Alabama have received commitments of $4.1 billion in grants, loans, director payments, or contracts related to Covid-19 relief.
  3. Sustained consumer spending. With the Paycheck Protection Program preserving payrolls, and unemployed workers receiving $600 per week in a supplement to unemployment insurance, spending shifted but didn’t contract to the extent it could have. Sales taxes dropped, then recovered and have been up and down in the months since. At the same time though, tax on internet purchases surged, offsetting the erosion in sales tax. Unlike some other states, Alabama’s sales taxes apply to groceries and medicine and thus it tends to be more stable.
  4. Thus far, a relatively quick recovery. By August, Alabama’s unemployment rate was 5.6%, down from 13.8% in April. That’s better than the national rate of 8.4%. September 2020 results on income and sales taxes trailed September 2019 results but not dramatically.

The overall stability of the budget masks some major shifts in some revenue sources. Some of the changes were pandemic related, some not. Here are some highlights.

General Fund Revenue Sources

The General Fund is supported by a myriad of tax sources. Traditionally, most of those sources saw little in growth from year to year, and the General Fund struggled to keep up with rising expenses in non-education expenses.

However, in recent years, some growth taxes have been added to the General Fund and support for general fund agencies has become more stable.

Big gainers

Simplified Sellers Use Tax: Revenue from this tax on online sales nearly doubled, up $69 million to $139 million. There are two reasons. First, this is a relatively new tax, and some new retailers joined the program for the first time. So, prior to the pandemic, the tax was already up significantly. When the pandemic set in, people shifted more spending to online purchases. While this tax, a portion of which also goes to the ETF, is expected to continue to grow, it is not expected to grow at nearly this rate in the future.

Transfers and Reversions: This boost of $44 million to the General Fund was inflated by a transfer from the Revenue Department. The department transferred $22 million in fees related to drivers who didn’t have Mandatory Auto Liability Insurance.

Insurance Premium Taxes: An additional $27 million flowed in from this tax on insurance premiums. This can be the result of more policies issued or a rise in the cost of insurance. This is the largest source of revenue in the General Fund contributing $412 million in 2020.

ABC Board: With bars closed and people stuck at home, Alabamians apparently flocked to liquor stores contributing an extra $17 million to the General Fund, an increase of 14%. Most of the jump occurred in April and May, which were record months for the ABC board.

Mortgage Record Tax: An additional $12 million flowed into the General Fund from this percentage tax charged on both refinances and home purchases. Revenues from this source accelerated in the June, July, August, and September as interest rates plunged and refinancing surged. For the year, the tax was up 38% over 2019.

Interest on the Alabama Trust Fund: A 10% jump came from the proceeds off the investments in the State’s savings account, the Alabama Trust Fund. The savings account is back at full strength now since Alabama repaid its previous borrowing from the fund that occurred during the Great Recession.  That and a strong stock market helped it generate $11 million more in 2020 than it did in 2019.

Big losers

Oil and Gas Production Tax: Thanks to the collapse in the oil market, this tax dropped by $13 million, down 41% from 2019.

Interest on State Deposits: The state earns interest on the cash it holds but because of dropping interest rates this source of revenue declined $11 million or 18%.

Lodging Tax: This tax on hotels and vacation rentals was down 15% for the year, collecting almost $9 million less for the General Fund. According to Finance officials, the drop would have been even more precipitous, but the Gulf Coast beaches saw a surge of business during the summer. The continued depression of convention and hotel traffic will continue to weigh on this revenue source, which is important for cities and for the state tourism agency. Hurricane Sally will also take a toll.

Court Costs: With the courts closed or severely limited in operation, the costs assessed to participants in the court system dropped by $5.4 million or 9%.

Education Trust Fund

The ETF supports K-12 schools and colleges and Universities. Flowing into it are the state’s two largest revenue sources: the income tax and the sales tax.

Big Gainers

Benefiting from growth taxes, the ETF has traditionally seen the strongest ups and downs: rapid growth in good times and jarring contractions with the economy falters. However, more recently the Legislature has spread some of the growth taxes and has imposed rules on how fast spending can grow. These restraints have thus far prevented mid-year budget cuts and have allowed the accumulation of reserve funds.

Income Tax: Income tax receipts to the Education Trust Fund totaled almost $4.7 billion in 2020, $109 million more than 2019, an increase of 2%. Pre-pandemic this tax was trending toward an astounding 7% increase.

Sales Taxes: The state received over $2 billion in sales tax revenue in 2020, $71 million more than last year was sent to the General Fund. In actuality, sales tax revenue increased 2.25%, solid growth, that didn’t fall off significantly during the pandemic. Smaller retailers did suffer during the closures, but grocery and hardware stores saw strong sales. With the enhancement unemployment compensation ended and continued uncertainty in the labor market, budget forecasters are keeping a close eye on this revenue source. However, so far, spending levels have held up. Revenues from September 2020 were 2.9% higher than in September 2019.

Simplified Sellers Use Tax: As in the General Fund, the contribution of this tax nearly doubled, bringing in an additional $23 million to the ETF. The proceeds of the tax are divided, with the ETF receiving 25% and the General Fund 75%.

Use Tax: A 14% increase in the Use Tax is not all because of growth. More than half the “increase” stems from the fact that the state had to pay a $12 million refund out of this tax source last year.

Biggest losers:

The Utility Tax: Down 3% or $13 million, this tax was lower because of lower energy use thanks to a cooler summer.

Mobile Telecom Tax: A dying tax, this tax applied to phone plans that sold talk time. For the most part, cellular plans now provide unlimited talk time at no charge but charge for data, which is not covered by this tax. Revenue continues to decline, down another $2 million or 18% lower than last year.

From the Year’s End Looking Forward

According to Finance Department officials, Alabama ended 2020 with $330 million balance in the ETF and a $315 million balance in the General Fund. That was result both of revenues that exceeded the budgeted amounts and expenditures that were lower than what was appropriated.

For the current fiscal year, FY 2021, Finance officials are relatively confident that revenues will more than cover the budgets. Lawmaker scaled back spending plans in light of the pandemic. As long as there aren’t additional unforeseen shocks to the economic system, the Alabama economy should generate the revenue needed to make the budgets as adopted this spring.

ETF

  • ETF 2020 budgeted: 7,125,895,252
  • ETF 2020 Receipts: 7,423,906,758.89
  • ETF 2021 budgeted 7,217,422,487

General Fund

  • General Fund 2020 budgeted: 2,192,379,876
  • General Fund 2020 receipts: 2,299,176,800
  • General Fund 2021 budgeted; 2,393,272,863

And if things were to falter, Alabama still has reserves to tap under extreme circumstances. Rainy Day Funds for both budgets have been repaid and additional budget stabilization funds are also available. As of now, none of those emergency measures have been employed.

RESERVE FUND BALANCES

  • ETF Budget Stabilization Fund – $373,269,077
  • ETF Rainy Day Account – $465,421,670
  • GF Budget Stabilization Fund – $27,297,483
  • GF Budget Rainy Day Account – $232,939,781

Proposed Statewide Amendment Analysis for November 3

When voters go to the polls on November 3, they will not only be voting in the primary race for President, Vice-President, one U.S. Senate seat, seven U.S. House of Representatives, multiple state judicial positions, and various other state and county offices, but voters statewide will also be asked to vote on six new amendments to the Alabama Constitution of 1901. An additional 36 amendments to the state constitution will appear on the ballots of individual counties across the state.

As always, PARCA provides a high-level analysis of each statewide amendment. We study the ballot wording, but also the authorizing legislation behind the language. We do not make recommendations or endorsements, rather we seek to understand the impact of the proposed changes and the rationales for them.

The Alabama Constitution is unusual. It is the longest and most amended constitution in the world. There are currently 948 amendments to the Alabama Constitution. Most state and national constitutions lay out broad principles, set the basic structure of the government, and impose limitations on governmental power. Such broad provisions are included in the Alabama Constitution. But Alabama’s constitution also delves into the minute details of government, requiring constitutional amendments for basic changes that would be made by the Legislature or by local governments in most states. Instead of broad provisions applicable to the whole state, about three-quarters of the amendments to the Alabama Constitution pertain to particular local governments. Amendments establish pay rates of public officials and spell out local property tax rates. An amendment from a few years ago, Amendment 921, granted municipal governments in Baldwin County the power to regulate golf carts on public streets.

Until serious reforms are made, this practice will continue, and the Alabama Constitution will continue to swell.

Read the full report here.