Lowest Per Capita Tax Collections in the Nation

Alabama once again ranks last in per capita state and local tax collections, according to new data released by the U.S. Census Bureau. Alabama has consistently maintained its No. 50 ranking since the early 1990s.

As a result, Alabama state and local governments have less to spend than governments in other states when providing services to the public. This lack of revenue is an underlying factor in the state’s recurring budget problems. The Governor and Legislature struggle to find enough money to adequately support the functions of state government. In the past several years, the government has made cuts to programs, borrowed from the state savings account, and applied one-time sources of money to balance the budget.

In 2015, the Legislature couldn’t agree on a General Fund budget until September, putting in place a budget just before October, the beginning of the 2016 fiscal year. Again, agencies’ budgets were cut, funds were shuffled between accounts, and modest tax increases were passed to balance a bare bones budget. The most recent comparative data available from the Census is from 2013, so the effects of the tax changes made in 2015 won’t show up for several years. However, the minor changes are unlikely to affect Alabama’s No. 50 ranking.

Low taxes per capita don’t necessarily mean low tax burdens for everyone. A mix of different taxes make up total tax collections, and each state structures its taxes differently. There are three principal types of state and local taxes: property, income, and sales. A tax system that is balanced among these three sources promotes fairness and stability. Alabama’s tax system is not balanced. Alabama has the lowest property tax collections in the country. To make up the difference, Alabama relies more heavily on sales taxes.

The rules governing how taxes are applied also makes a difference in who pays them. In Alabama, property taxes are structured in a way that benefits homeowners, and owners of land in use for agriculture or timber. Commercial and utility property owners pay more than those protected classes.

Meanwhile, Alabama’s average combined state and local sales tax rates are 4th highest in the country, according to the Tax Foundation. Those taxes fall most heavily on low-income Alabamians since they spend a greater share of income on goods that are taxed. Many states attempt to lighten the burden by exempting groceries from the sales tax or giving an income tax rebate to low-income families. According to the Center for Budget and Policy Priorities, only two states, Alabama and Mississippi, allow the full weight of the sales tax to apply to groceries.

Concerning the income tax, most states employ measures to minimize the income tax that low-income households have to pay. Alabama, by contrast, begins taxing income at one of the lowest thresholds in the U.S. Alabama is one of only three states that allows taxpayers to fully deduct federal income tax paid, when calculating their tax bill. That tax break provides a larger benefit for more affluent families, who pay more in federal taxes.

Here’s how Alabama tax revenues per capita rank in the various categories of taxation.

Alabama has low tax collections per capita for two reasons: low tax rates and a relatively small tax base. One way to measure a state’s tax base is to look at gross domestic product, the value of all goods and services produced in a state. Alabama ranks 45th among U.S. states on GDP per capita. In the Southeast, Louisiana, North Carolina, Georgia, Tennessee, Kentucky, and Florida have higher per capita GDP than Alabama. Arkansas, South Carolina, and Mississippi have lower per capita GDP. Alabama applies low tax rates to a smaller taxable base to produce the lowest taxes per capita, not only in the region, but also in the nation at large.

In the interactive presentation below, Alabama’s tax collections are compared to other Southeastern states. In general, these states have similar demographics and similar attitudes toward taxes and the size of government. Using the geography menu, you can change the comparison states.

 


From Governing: How Mobile, Alabama, Used Instagram to Address Blight

Like many cities, Mobile, Ala., didn’t even know how many blighted properties it had. Instagram offered a cheap and simple way to start figuring that out.

Mobile’s use of social media tools to combat urban blight is featured in a recent post on Governing Magazine’s States and Localities blog. Read about the work of Mobile’s innovation team, which was made possible by a three-year $1.65 million grant from Bloomberg Philanthropies.

Source: How Mobile, Alabama, Used Instagram to Address Blight


General Fund Sputters Along

Despite the healthy economy, the state’s General Fund posted its usual sputtering performance in 2015, according to the state’s year-end revenue collection reports.

The General Fund, which supports the non-education functions of state government, received about $1.8 billion in 2015, up from approximately $1.7 billion in 2014. However, that total includes a $105 million transfer from a business tax escrow account. Without that one-time transfer, General Fund revenue collections would have been up just 1.4 percent over 2014. And in both 2014 and 2015, the General Fund was supplemented with $146 million in borrowing from the Alabama Trust Fund.

Neither the $146 million nor the $105 million will be available for 2016. That’s the scenario that set the stage for the Legislature’s protracted struggle to pass a budget for 2016. Anticipating that $251 million hole, the Legislature balanced the 2016 General Fund budget by cutting state agencies, adding some new revenue by raising the cigarette tax, and shifting more of the use tax from the Education Trust Fund to the General Fund.

Those measures will allow the General Fund to sputter along another year, but they won’t solve the long-term problem: The General Fund’s hodgepodge of taxes don’t grow at the same rate as the economy. As the cost of those non-education services rises, the General Fund doesn’t keep pace.

The chart below lists the revenue sources that supply the General Fund and compares performance in 2015 to collections in 2014. A discussion of major fluctuations follows the chart.

Abandoned Property: Each year, financial institutions and businesses that lose contact with the customers turn millions of dollars over to the Alabama Treasurer’s Office. The State Treasury attempt to return the assets — cash, stocks, bonds, insurance benefits and even valuables from safe deposit boxes — to the rightful owners. Currently, the state has about $420 million in unclaimed assets, each year some small portion of that is released to the General Fund. The distribution was higher in 2015 than in 2014, but according to state financial officials the $20 million increase in the 2015 distribution was due to the normal variation.

Corporation Tax: The big jump in the revenue from this tax comes from a one-time distribution of $105 million from an escrow account. Money was being held in that escrow account to pay back companies that paid a now-defunct franchise tax. That tax was ruled unconstitutional, and the money has been gradually paid back from this escrow account set up to pay the claims. That payback process is now over, and the remaining money was deposited into the General Fund in 2015.

Use Tax: The use tax is the sales tax as applied to goods purchased from another state. Traditionally, sales and use taxes have gone to the Education Trust Fund, but in recent years the Legislature has shifted some of the use tax into the General Fund, adding a growth tax to the General Fund. The “Use Tax Remote” is the use tax on sales made across state lines over the Internet. That portion of the use tax has been growing at a healthy pace. For 2016, even more of the use tax will be shifted from the Education Trust Fund to the General Fund. The Legislature estimates that the change will add another $80 million to the General Fund.

Cigarette Tax: Revenue from the tax on cigarettes continued a multi-year decline corresponding to declining smoking rates. The 1 percent drop would have been steeper if not for a rush to stock up on cigarettes in September. Cigarette packs purchased in September weren’t subject to the 25 cents per pack increase that went into effect Oct. 1. The Legislature estimates the higher tax on cigarettes will generate $66 million in additional revenue in 2016.

Oil and Gas Production Tax: In 2015, revenue from this tax on the value of sales of gas and oil produced in the state declined by $30 million due to falling prices of oil and natural gas.

Alabama Trust Fund: Revenue from the Alabama Trust Fund declined. This distribution is based on the size of the state oil and gas trust fund. Since the state has been drawing $146 million a year out of the fund for the past three years to pay for operations, the regular distribution is shrinking, despite positive returns on investments. In 2016, the borrowing ends but the long term effect of the withdrawals will be felt for years to come.

Cellular Phone Tax: This tax on cellular phone minutes continues to drop since cell phone companies have been shifting customers to data plans, which are not subject to the tax.

Looking at other sources, higher revenue from alcoholic beverage sales drove up profits from the state’s Alcoholic Beverage Control Board. Revenue coming from the interest on state deposits was down as interest rates continue to be low. However, banks showed signs of better profits, leading to an increase in collections of the Financial Institutions Excise Tax.


PARCA Talks State Budget

With the passage of the state’s general fund budget last week, PARCA Senior Research Associate Tom Spencer took a moment to sit down with WBHM’s Andrew Yeager to provide an overview of the budget and how some of the key departments will be affected.

“Medicaid, prisons, and education had strategic plans in place,” said Spencer. He says that allows lawmakers to make budgeting decisions for those parts of state government within an existing framework. That kind of planning doesn’t happen with other general fund agencies. With cuts to many agencies starting at 6 percent and no strategic plans in place, it’s hard to know the effects it will have on those agencies.

“We spent a lot of time [in the special session] with proposals coming from left and right about what to close and what to eliminate,” said Spencer. “They weren’t really based, in a lot of cases, on good solid information or well-thought-out plans.”

PARCA has recommended for years that the state adopt a system called performance-based budgeting. Performance based budgeting differs from other budgeting methods by focusing on policy goals and results rather than money spent.

“Figure out where you are, set a goal of where you want to go, identify the strategies that will get you to where you want to go, show what kind of investments need to be made, and pursue that. Measure your results, discard things that aren’t working and adopt different strategies,” Spencer said.

“State and local taxes are the lowest per capita in the United States of America. We have to run more efficiently than anybody else if we want to provide the same level of services. If we’re not asking tough questions and paying close attention to the bottom line, we’re not going to get good results.”

 Click here to listen to the full interview.




Back to the Basics on Taxes and Budgeting

With the Governor and Legislature still at odds over how to solve a $250 million shortfall in the state’s General Fund, we thought it would be useful to again call attention to two essential underlying problems that explain why we are in the current predicament. PARCA has written about both recently and, over the past two decades, frequently.

1. Alabama state and local governments collect less tax revenue per capita than any other state in the United States. Governments here have less to work with when trying to provide services equivalent to those offered in other states.

2. Alabama doesn’t budget, in a meaningful sense. In the absence of a budgeting system that prioritizes investments and measures results, the Governor and Legislature simply try to balance revenue with expenditures, resorting to borrowing and shuffling money between accounts in times of scarcity.

Starting last fall, PARCA wrote about the building budget crunch coming in the state General Fund. Our annual meeting featured promising plans to unpack our overcrowded prisons and reform the way Medicaid works in Alabama. The long-term intent of both of those reform efforts were to put in place more effective approaches that would save money in the long run. Both plans will fall apart under the no-new-revenue General Fund budgets that have been passed and vetoed thus far. Failure to address the prison problems could lead to federal takeover. The potential damage to Medicaid will have serious consequences for the entire health care system. This memo produced by state agency heads this spring gives a concise assessment of what the no-new-revenue budget would mean for the courts, mental health, public safety, state parks, environmental enforcement, and a host of other state services.

The governor has proposed a package of taxes that his office anticipates would raise $300 million more per year. If that package were to pass and the projected revenue were generated, Alabama would still rank 50th in per capita tax collections.

 


Governor Pledges Bold Action on the Budget at PARCA Annual Meeting

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Speaking before a sell-out crowd of more than 400 at the Harbert Center on Friday, Feb. 13, Gov. Robert Bentley said he will propose bold solutions in the face of a steep budget shortfall.

In his luncheon address, Bentley said that during his first term he had held the line on spending, shrunk the state workforce, and encouraged efficiency and reform. While efforts along those lines will continue in his second term, Bentley has concluded that additional tax revenue is needed for the state to balance its budgets. The state faces a shortfall in the general fund budget of more than $250 million. The state’s spending on education is still below its pre-recession levels.

Bentley’s remarks followed a morning of presentations on major areas of state spending: Corrections, Medicaid, and education. In each of those areas, leaders have examined the current situation, set goals for improvement, and devised strategies to pursue those goals.

In all three cases, investments in reforms should avert higher costs in the future and produce better outcomes for citizens.  PARCA Executive Director Jim Williams said the careful analysis and goal-oriented thinking in these departments should be an inspiration to the rest of state government. It points toward a better approach to management and budgeting, which is vitally important in a state that collects less tax revenue per capita than any other.

The morning featured the following presentations:

State Sen. Cam Ward and Alabama Sentencing Commission Executive Director Bennet Wright spoke on solutions to the state’s prison overcrowding problem. Wright outlined proposed changes to sentencing, prisons, and community supervision.

Alabama State Health Officer Don Williamson explained plans to move more beneficiaries of the Alabama Medicaid System away from fee-for-service system into managed care.

Care Network of East Alabama Executive Director Kim Eason and Chronic Care Coordinator Julie Wells explained how a pilot version of Medicaid’s new approach is working to improve patient outcomes and decrease use of costly hospital care.

And finally, Alabama State Superintendent of Schools Tommy Bice presented an update on the progress of Plan 2020. The high school graduation rate is climbing, but schools have serious challenges ahead in closing the achievement gap between low income students and their middle class peers and in making sure high school graduates are ready for college and career.  Some of those challenges are illustrated in graphics from Jim Williams’ presentation, on Producing College and Career Ready Graduates.


Court cost collections continue to sag

In tough budget years, lawmakers have often looked for alternative ways to bring in revenue to support state government operations. In the case of the judicial branch of government, the Legislature has repeatedly raised the charges, fees and fines charged to the users of the court system, shifting much of the cost burden for court operations to the courts themselves.

However, court cost collections have proven to be a less than reliable source of revenue. In 2014, total criminal and civil court collections were down by $8.5 million to 2013, a drop of 6 percent. Compared to 2011, total court cost collections are down $17 million, or 10 percent. That’s a decline in collections even through the Legislature raised fee amounts during that same time period.

About 2/3 of court costs are collected through the criminal courts, amounting to just over $96 million in collections in 2014. The biggest component of that is traffic court collections. And that’s where the steepest drop in collections has come. In 2014, the state court system collected $54 million through traffic courts across the state, compared to $72 million in 2011. That’s an $18 million decline, or a 25 percent drop, over that time period.

This decline could be linked to problems in other departments. The Department of Public Safety reports that currently it has only 289 Troopers assigned to Highway Patrol statewide, far short of past staffing levels. According to figures provided by the State Personnel Department, DPS, as a whole, had 276 fewer employees in FY 2014 than it did in 2008, which amounts to an overall decrease in employees of nearly 20 percent. According to DPS, troopers issued  792,860 citations in 2012. That number fell to 690,323 citations in 2013. From January to November of 2014, troopers had issued 663,414 tickets. Beginning in 2015, DPS will be folded into the new Alabama Law Enforcement Agency. LEA director Spencer Collier has said he plans to put a priority on putting more troopers on the road.

Collections in the civil courts make up the remaining 1/3 of collections, totaling $48 million in 2014.That total is roughly the same amount collected in 2011.


The Nation's Longest Constitution Just Got Longer

Enlarge to explore.

It’s now official. In 2014, Alabama added 12 more amendments to its constitution, bringing the total number to 892. The State Elections Canvassing Board met the final week in November and certified the election results.

The additions include amendments restating, in stronger term,s the right to hunt, fish, and bear arms. The Alabama Constitution of 1901 also now allows a sewer authority in Franklin County to provide broadband internet and requires a $1 per bale assessment on each bale of cotton to be used for cotton promotion (With the latest amendment, you can’t ask for a rebate on that assessment).

The additional verbiage added this year will allow Alabama to continue padding its lead in constitutional length. Alabama not only has longest state constitution in the U.S, it is perhaps the longest constitutional document in the world.

By comparison, the U.S. Constitution is more than twice as old and has only been amended 26 times. State constitutions do tend to be more detailed and amended more often. But the average number of amendments across the states is 150. The next closest state to Alabama is California with 527 amendments.

According to a tally kept by the Council of State Governments, Alabama’s Constitution, at more than 376,000 words (without the 12 new amendments) is more than four times as long as the Texas Constitution. That’s the second longest state constitution, at just under 87,000 words.

That makes from interesting trivia, but does it matter?

If you want clarity, efficiency, and effectiveness, it does matter. If you want responsibility and accountability, Alabama’s constitution is indeed a problem.

Typically, constitutions describe principles and fundamental philosophy, set out a framework for government structure, and divide state powers among the branches and between state and local governments.

The Alabama Constitution, by contrast, goes into tedious detail. While the constitution may have started by laying out general statewide principles, its accumulation of amendments is due in to the exceptions to those principles and special cases made for specific localities. It is estimated that 70 percent of the amendments are local in nature. Which begs the question: Why are they in the state constitution?

The framers of the Alabama Constitution of 1901 wanted to set limits on government. In particular, they wanted strict limitations on what local governments could do. So, they set up a system in which many local decisions have to flow through state government for approval. The local amendments to the Constitution are only the top layer of complexity. Below that, the state legislature has passed over 36,000 local laws which apply to specific counties or municipalities.

The heavy involvement of state legislators in local affairs tends to create confusion about who is responsible for decision-making. It also blurs the lines of accountability when things go wrong. And finally, it also interferes with the development of a culture of statewide planning and policy making, which the state needs the Legislature to play.

Despite the energy put into constitutional reform efforts over the decades, the issue of granting local governments more independence has been one of the most intractable.  The latest Constitutional Reform Commission finished its work earlier this year, and its final round of proposals included an amendment that would have granted counties limited home rule in some aspects of their operations. That proposed amendment failed to pass the Legislature.


Budding interest in changing the way we budget in Alabama?


Budget discussion, State Board of Education, Nov. 12

With the General Fund facing an acute shortfall and the education budget still struggling to recover to pre-Great Recession levels, there are beginning to be conversations about new approaches to budgeting.

At a recent State Board of Education meeting, State School Superintendent Tommy Bice told board members he was in discussion with the governor’s office and representatives of the legislative leadership about formulating a budget request that was strategic and deliberate rather than “shooting the moon.”

That would be unusual. This is the season when state agencies draw up their budget requests and submit them to the governor’s office, an annual ritual that bears some resemblance to making up lists for Santa Claus. Budget requests are typically an expression of wishes or needs, without regard to what Santa can realistically deliver, and without a clear link to achievable, measurable goals.

But in this case, the State Board of Education does have goals and will have a system of measuring progress toward those goals. The current wish list is well beyond currently available resources but it does step back from an immediate demand for a full restoration of pre-Recession spending levels.

In his presentation to the Board, Bice described conversations with the governor’s office and the Legislature under which the parties would pursue a three-year plan to fully fund the Foundation Program, the mechanism the state uses to distribute most of its support to local school systems.  He also listed items requested by the State Department that would support the goals of Plan 2020, the state’s plan to raise the quantity and quality of graduates from Alabama K-12 schools. State Board Member Mary Scott Hunter said she was encouraged in her conversations with legislators who’d said they wanted to pursue an education budget built on planning and goals.

“I think it highlights the need to be deliberate and strategic,” Hunter said, “and to be working with our colleagues across the street.”

Still, there is a wide gulf between the money available and the Department’s aspirations for K-12 schools.

Under the current controls on education spending growth, the Department of Education estimates that K-12 education could have an additional $35-40 million to spend in 2016.

But the department’s draft budget request, envisions asking for an additional $228 million for K-12 education in 2016.

The largest portion of that request is $175 million to begin the process of restoring full-funding for the Foundation Program. The Foundation Program is supposed to provide enough for an adequate and equitable education at schools across the state. Since the budget problems developed, various components of the Foundation Program — operating support, technology, textbooks, professional development, classroom and library supplies, and transportation — have been cut or zeroed out. The $175 million portion of the request also includes a one percent pay increase for employees and the first installment of a plan to restore 1,066 teaching positions lost to budget reductions.

Beyond that money for local systems, the State Department is proposing an increase of $51 million in various state-level initiatives that support the strategic priorities of Plan 2020.

Those include:

  1. $10 million to pay for the new suite of assessments that measure student and school academic progress.
  2. $5.1 million to expand the Alabama Math and Science Initiative.
  3. $5 million to meet the demand for distance learning and to establish a virtual high school.
  4. $5 million for an initiative to recruit new teachers into the profession and for creating alternative routes for career advancement other than moving into administration.
  5. $5 million for expanding the network of Family Resource Centers to better connect schools and students to community resources.
  6. $5 million for further Career Tech expansion.
  7. $5 million for a competitive grant pool to support innovation in schools.
  8. $4.8 million increase needed to support systems’ assessment of learning needs in special populations of students.
  9. $3.8 million for a system of online, formative assessments provided to school systems.
  10. $1 million to complete the planned expansion of Advanced Placement courses.
  11. $1 million to establish a competitive grant program to help schools pay for arts education with an emphasis on those systems that currently can’t afford it.

 

 


2014 Education Trust Fund Performance

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While the looming shortfall in Alabama’s ailing General Fund has received much attention, the state’s Education Trust Fund (ETF) isn’t exactly enjoying robust growth, according the recently published year-end report on receipts to the fund.

The ETF, which pays for public K-12 and higher education plus an assortment of other smaller agencies, grew just 2.1 percent over 2013. And revenue from Alabama’s income tax was practically flat in FY 2014 as compared to 2013.

The income tax provided 60 percent of the Education Trust Fund’s $5.8 billion in revenue in 2014. Sales and use taxes provided another 32 percent. A public utility tax provided 7 percent of the total. A handful of other taxes made up the remaining 3 percent.

Since it contains the income tax and most proceeds from the state sales tax, the ETF tends to grow with the economy. For example, sales tax receipts to the Education Trust Fund increased by 5 percent.

However, that number is somewhat inflated. In 2013, lawmakers sent $52 million straight to K-12 schools rather than depositing it in the Education Trust Fund first. This year, that $52 million drops into the ETF, creating the appearance of extra growth. Growth in sales tax collections were more like 2 percent.

According to analysts, this year’s income tax receipts, at least as they compare to 2013, are also skewed. Income tax collections jumped more than expected in 2013, thanks to some selling of stocks and the end of 2012. Those moves, made in anticipation of higher tax rates, produced a one-time jump in revenues in 2013. Looking at wage income alone, taxes collected through withholding increased about 2 percent in 2014 over 2013. But thanks to the inflated 2013 number, overall income receipts to the General Fund increased just 0.8 percent.

During the current fiscal year, the state is anticipated to make its final repayment of the $437 million borrowed for education from the Rainy Day Fund during the economic downtown. The state still owes $92 million that is due by Sept. 15, 2015.

All in all, the Education Trust Fund has still not recovered enough to provide the level of funding for schools it provided in 2008, before the Great Recession. The final repayment and a pickup in job growth in recent months should allow for some improvement in the 2016 budget year.