Lowest Per Capita Tax Collections in the Nation

By on December 4th, 2015 in , , : in State & Local Government

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.