Thanks to a booming economy, Alabama saw significantly increased revenue to both the General Fund and the Education Trust Fund (ETF) in 2018, with collections far exceeding expectations.

By the September 30 end of the 2018 fiscal year, collections for the state General Fund were up 4 percent or $76 million over FY2017, bringing in just under $2 billion. Revenue to the ETF grew by 6.7 percent, up $426 million over 2017, for a total of $6.7 billion in 2018.

Both funds ended the year with a balance, with revenues exceeding expenditures by $80 million in the General Fund and $336 million in the ETF. The balance in the General Fund will be available to fund either supplemental appropriations or to pad to the 2020 budget. A portion of the ETF balance, $64 million, will be shifted into what’s called the budget stabilization fund, which was set up as an auxiliary savings account which can be tapped if the economy contracts. The remaining $272 million of surplus will be shifted into the advancement and technology fund. The Legislature can spend that fund for certain purposes including the purchase of education technology and equipment.

Strong growth in the General Fund can be credited to the growing economy, but also to decisions by the Legislature in recent years. The General Fund traditionally saw little growth even when the economy was expanding because growth taxes, principally income and sales taxes, were all deposited in the ETF. However, the Legislature shifted some sales taxes, particularly a portion of the sales taxes on goods sold over the internet, to the General Fund. Strong growth in those taxes padded the General Fund’s bottom line.

The effects of the federal tax cut also had something to do with the increased revenue. When federal taxes go down, Alabama collections go up since federal income taxes are deductible from state income taxes. When individuals and corporations pay less in federal taxes, a greater share of earnings is subject to the Alabama income tax. Budget officials in Montgomery have estimated that the difference in the federal tax law will mean an annual boost to Alabama receipts in the $30 to $40 million range.

The rosy revenue picture is not clouded by huge impending financial needs as it has been in the past. Cost growth in Medicaid has slowed, and Congress has extended federal support for the Children’s Health Insurance Program, which was an uncertainty earlier this year. The one area of persisting uncertainty is the amount that will be needed to comply with a federal court order to improve conditions in prisons.

The General Fund

The General Fund grew robustly even though it didn’t receive the $50 million per year deposit it had been receiving from a settlement resulting from the BP Oil Spill. The fund also paid out $11 million in a settlement to AT&T. AT&T had collected and paid to Alabama taxes on wireless data plans. Under federal law, internet access is exempt from taxation. Cellular voice service is subject to taxation, and the mobile telecommunications tax used to be a major revenue source. However, wireless companies have lowered their charges to customers for voice calling and shifted much of the cost of service to data plans, which aren’t supposed to be taxed. Proceeds from the tax are now about half what they were in 2013.

Another declining tax source for the General Fund is the tobacco tax. The tax brought in $155 million in 2018, almost $9 million less than the year before.

But those and other declines were more than offset by growing revenue from other sources. Insurance company taxes and corporate taxes were up by $30 million and $21 million respectively. Bringing in $349 million in 2018, the tax on insurance policies is the largest individual source of revenue to the General Fund.

Thanks to rising interest rates, the revenue from interest on state deposits increased by $18 million. Revenues from the Alcoholic Beverage Control Board were up by $15 million. The portion of the Use tax that goes to the General Fund increased $14 million. The Simplified Seller’s Use Tax, a sales tax on online purchases, was up $10 million. Revenue disbursed from the state’s abandoned property fund was up by $9 million.

 

The Education Trust Fund

The biggest boost to the state bottom line came through collections of the income tax, which were up 8.2 percent, as more people were working and earning more money.

Sales taxes increased 5.34 percent as consumers spent more. These are the highest growth rates since before the great recession, and the overall 6.7 percent growth in the fund during 2018 is the highest growth rate seen since prior to the Great Recession.

The strong performance in 2018 indicates the state should not have a problem meeting the spending levels set in the 2019 budgets. The Legislature budgeted spending $2 billion from the General Fund and $6.6 billion from the Education Trust Fund in 2019.