INCREASES, DECREASES, AND TRENDS IN THE REVENUES SUPPORTING THE STATE GOVERNMENT

Executive Summary

The 2023 fiscal year, which ended on September 30, was a mixed year for Alabama revenue collections.

After several years of strong growth, Alabama tax collections turned in a mixed performance in 2023, with the General Fund (GF), which supports non-education spending, up substantially. Education Trust Fund (ETF) revenues, meanwhile, were basically flat after increasing by record levels in 2022.

GF collections increased 16.6%, led by a steep rise in revenue from interest on state deposits. The ETF barely budged, up 0.11%, with sales tax revenue increasing but income tax revenue down. That’s according to reports released last month by the state.

PARCA’s interactive charts allow you to explore trends in the various revenue sources that support the operations of state government in Alabama. For a detailed review of FY 2023 collections, see our complete report in a printable version. Or read an embedded copy of the report below.

PARCA’s new report, titled E-Commerce and Taxation: Questions of Efficiency and Equal Treatment, questions whether changes are needed to the state’s Simplified Sellers Use Tax (SSUT).

Executive Summary

Alabama’s tax on online goods sold by out-of-state sellers, the Simplified Sellers Use Tax (SSUT), has been a boost to state budgets but a mixed blessing for local governments and schools. As online commerce continues to grow, the assessment and distribution of the tax is increasingly important and potentially problematic.  

At the state level, the SSUT is the equivalent of the state sales tax, a 4% levy on online sales, the same rate that is applied to sales in Alabama stores. In terms of state taxes, the SSUT creates a level playing field between online vendors and brick-and-mortar stores. But at the local level, the tax creates winners and losers.

• Online retailers benefit from a simple system, paying a total of 8% on all purchases made by Alabamians. The proceeds are divided in half between the state and local governments.
  


• Brick-and-mortar stores are put at a competitive price disadvantage. The weighted average sales tax is 9.25%[1] across the state, and thus, most in-person sales are subject to higher taxes than online purchases.
  


• Communities with less commercial activity and lower wealth benefit from the distribution formula of the SSUT because the proceeds are distributed on the basis of population, not where the purchase occurs.
  


• Big cities and counties, which tend to have higher sales volume and local sales tax rates higher than 4%, receive less from online purchases made by their residents than if those same purchases were made in person.
  


• A proportion of local sales tax goes to 227 school systems. Only a limited number of the systems have worked out agreements to get a similar share of the SSUT.

Considering the divergent interests involved, no one policy solution satisfies all parties. Options include:

• Raise SSUT’s rate to match the prevailing local sales tax rate.
  


• Join the 24 other states participating in the streamlined sales tax, which would allow a unified system for applying and remitting sales taxes for online and in-person sales. The local tax rates could be applied, but only one entity would collect state and local taxes, eliminating local oversight.
  


• Build our own system for online retailers to look up and submit sales taxes based on where the purchase is made.

Since state and local coffers are full at the moment, immediate action on the SSUT is not expected. However, the issue will become more central with the continued shift toward online sales.

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[1] Janelle Fritts, “State and Local Sales Tax Rates,” Tax Foundation (blog), accessed March 22, 2023, https://taxfoundation.org/publications/state-and-local-sales-tax-rates/.

Introduction

The SSUT is Alabama’s tax on goods sold by online, out-of-state sellers. Since its adoption in 2015, more and more consumers have chosen online shopping carts over their metal counterparts.

According to the US Census Bureau’s Retail E-Commerce Sales Report, online sales accounted for less than 1% of sales in the fourth quarter of 1999 compared to 15% of all retail sales—more than $260 billion—in the fourth quarter of 2022.     

Figure 1. Total E-Commerce by Quarter and E-Commerce at a % of Overall Retail Sales, U.S. Census

The changes in the way we buy also affect the way we pay for state and local government. Shifts between traditional and online sales alter the flow of revenue with important consequences for the General Fund and Education Trust Fund, counties and municipalities, and schools across Alabama.

Although the SSUT was initially celebrated for capturing an elusive revenue stream, its distribution formula has led to debates about fairness. The SSUT’s rate is lower than the rate for in-person purchases in most large cities, creating an advantage for online retailers at the expense of brick-and-mortar stores. The growing volume of commerce the tax applies to has sparked fears that the traditional sales tax will diminish in favor of the online alternative. That, in turn, would diminish the revenue that cities and schools depend on.

Figure 2. Estimated Growth in E-Commerce Activity, based on collections of the Simplified Sellers Use Tax

This report aims to explain the SSUT’s origin, describe how it works, analyze its implications, and discuss alternative policies so that Alabamians are equipped for the conversation on the SSUT.

The Origin of the Simplified Sellers Use Tax

Traditionally, states were limited to applying sales tax only to transactions within their borders. That norm was challenged in the 1990s by Quill Company, which sold office equipment and stationery over the phone and through mail-order catalogs. A Delaware corporation, Quill shipped goods all over the country. Those sales went untaxed until the North Dakota State Tax Commissioner tried to force the company to collect and pay taxes on their sales in that state.

Supreme Court Decision Blocks Taxation on Certain Interstate Sales

The Supreme Court ruled in Quill’s favor and struck down the North Dakota tax. From 1992 to 2018, a company without a “physical nexus” (an existing retail outlet) in a state would not be subject to any taxation from that state. The decision, which revolved around mail-order catalogs, helped make way for the unforeseen boom in online retail sales.

In 2000, e-commerce retail sales made up less than 1% ($6 billion) of total sales in the U.S. By 2010, that percentage had climbed to nearly 5%, representing $45 billion in sales. That commerce went largely untaxed. Alabamians were expected to report their online spending when they filed their tax returns and to pay taxes on those items purchased. That is known as a consumer use tax, a companion to the sales tax, but it applies to purchases made in another state. The use tax is generally paid by the buyer rather than the seller.

But relying on consumers to self-report online purchases and pay taxes through the income tax system was ineffective. As states recognized they were missing out on an increasing share of revenue, they began to develop policies to capture it and lobbied for a national solution to the problem.

SSUT Initially Established as an Optional System for Online Sellers

Initially, states created voluntary tax schemes, like Alabama’s SSUT, for sellers to collect and remit online sales taxes. By 2018, 45 states had 45 policies with different qualifications, thresholds, and expectations for compliance. Alabama’s was called the Simplified Sellers Use Tax: “simple” because of its statewide flat rate of 8%, “sellers” because it put the burden of remitting on the out-of-state vendors.

Established by Act 2015-448, Alabama’s SSUT went into effect in January 2016. Its simple state-level rate of 8% made it easy for online vendors to collect a flat rate on sales statewide and submit the proceeds to the state rather than collecting and remitting sales taxes to each municipality and county where they sold items.

Meanwhile, pressure continued to build to allow states to tax online sales, particularly as it became increasingly clear that online retailers were benefiting from an advantage over brick-and-mortar stores located in local communities.

Supreme Court Reversal Allows States to Tax Online Sales

In 2018, the U.S. Supreme Court reversed the Quill decision, and in South Dakota v. Wayfair upheld a South Dakota law that required online sellers to collect and remit taxes on their sales in the state. The Wayfair decision led states, including Alabama, to amend and mandate their respective tax policies. The ruling stipulated, though, that state tax schemes should not put an undue burden on sellers.

Alabama’s SSUT Laws and Amendments

Since its establishment as a voluntary tax, the SSUT has been revised multiple times to conform to the changing environment. Highlights include:

Act 2015-448

Established SSUT. Allowed vendors with no physical nexus in the state to collect and remit an 8% tax on all online purchases destined from Alabama. The amount and its distribution proportions aim to mimic sales tax: a 4% tax levied by the state and 4% meant to represent local sales taxes. 

Act 2016-110

A business in the program may remain unless they establish a storefront or an affiliate business has a physical nexus.

Act 2018-539

Mandates marketplace facilitators with revenue of more than $250,000 to collect and remit. Additionally, a 2% discount (of the tax collected, not a reduction of the 8% SSUT rate) will be allowed on the first $400,000 remitted if remitted in a timely manner.

Updated the distribution formula to its current formation:

• State of Alabama takes half (4 cents on every SSUT-eligible dollar spent)
  • General Fund = 75% of the state share
  • Education Trust Fund = 25% of the state share

• Local Governments receive the other half of the revenue (4 cents on every SSUT-eligible dollar spent)

• 40% to counties
  • Individual county share based on the county’s share of the state population
• 60% to municipalities
  • Individual city share based on the city’s share of the total municipal population

Act 2019-382

Updates the amnesty and class action provisions for eligible sellers.

Figure 3. Growth in total collections of the Simplified Sellers Use Tax

How Has the SSUT Worked for State Government?

Alabama has an unusual approach when it comes to taxes and spending, an approach that has led to perpetual problems with budgeting. In most states, a mixture of taxes is levied, collected, and deposited into a General Fund. Then a budget reflecting the state’s priorities is created, and the funds flow out accordingly.

In Alabama, the bulk of taxes are earmarked by law, collected, and spent for a specific purpose. The largest sources of state revenue, the income tax and the state sales tax, are earmarked for education.  

That has been good for education in good economic times because those taxes grow with the economy. In bad economic times, that has been a problem because revenues contract and cuts have to be made. For the rest of the government, earmarking creates a problem. There is not enough money to pay for needs, and what revenue there is does not grow enough to keep up with inflation.

In recent years, the Legislature took steps on both the budgeting and the revenue side to improve the situation. On the budget side, they set up a system that keeps from overspending during periods of growth.

On the revenue side, the SSUT was one of a handful of enhancements that injected much-needed growth into the General Fund.

Historically, the General Fund, which pays for non-education functions of state government, has been slow growing. The addition of the SSUT has helped change that equation, adding a rapidly growing revenue source to the General Fund.

The General Fund receives 75% of the state share of the SSUT ($233 million in 2022), providing 8% of the fund’s total. The remaining 25% of the state share of the SSUT flows into the Education Trust Fund.

Figure 4. The SSUT’s Contribution to the Education Trust Fund and General Fund, 2015-2022

SSUT collections as a percentage of the funds have grown as well. In addition to the SSUT growth, the General Fund has benefited from adjustments to and growth in the traditional sales and use taxes.

In 2015, the General Fund (GF) received a total of $1.9 billion, and the Education Trust Fund (ETF) received a total of $6 billion. At the time, the SSUT contributed nothing to either. Meanwhile, sales and use taxes made up 9% ($168 million) of the GF and 32% ($1.9 billion) of the ETF.

In 2022, the GF received $2.8 billion, and the ETF received $10.4 billion. The SSUT contributed 8% ($233 million) and 1% ($78 million) of the GF and ETF, respectively. Meanwhile, traditional sales and use taxes made up 15% ($418 million) of the GF and 26% ($2.7 billion) of the ETF.

Figure 5. Change in Contribution of the SSUT and Sales and Use Tax to the Education Trust Fund and General Fund

While the SSUT arguably shifts revenue from the Education Trust Fund that would have been collected as sales tax, the rise of online sales has occurred at a time when the traditional sales tax and income tax have grown rapidly.

Thus, despite the change in flow, the ETF has seen healthy growth as well. Sales tax collections rose more than 40% from 2015 to 2022, but other revenue—principally the income tax—rose even more. Revenue from income taxes nearly doubled, from $3.9 billion to $7.4 billion in 2022.

Figure 6. Overall Growth in Alabama Education Trust Fund and General Fund, 2012-2022

How Has the SSUT Worked for Local Governments?

At the state level, the SSUT closely parallels the state’s general sales tax, except in its division of proceeds between the General Fund and the Education Trust Fund. At the local level, though, the revenue produced by SSUT and distributed to local governments does not match local sales tax rates or activity level.

Whether or not the SSUT should closely resemble local sales tax is a policy decision. Presumably, online sales compete with local brick-and-mortar sales. Those local brick-and-mortar stores must collect a higher sales tax rate than online retailers. Brick-and-mortar stores also pay property taxes and employ more local residents than are supported by delivery services linked to online retailers.  

At the same time, sales tax collections tend to be concentrated in larger communities. Those larger communities benefit from not only the sales taxes paid by residents but also from sales taxes paid by people from other towns and unincorporated areas who drive in to shop.

With the rise of online sales, should the taxes paid on goods purchased on the Internet and delivered to doorsteps reflect the existing shopping patterns? Or should the proceeds of online sales taxes be equally distributed according to where people live?

Currently, the SSUT reflects a simplified collection and distribution system with a flat rate and a distribution by population. Cities, counties, and school systems that benefit from taxes generated under the local sales tax system see the online option as a competitive threat, with a competitive advantage created by the SSUT.

At the same time, cities and counties without a strong commercial base may be benefiting from an online delivery system that decreases their residents’ need to travel to commercial centers while generating taxes that would otherwise have flowed to commercial centers.

Figure 7. Distribution of the Simplified Sellers Use Tax, as divided between state and local governments, 2022

Counties

Counties are now receiving 20% of total SSUT collections.

For those counties with little income from sales tax, the money from the SSUT represents new revenue. But counties that generate significant sales tax revenue might be missing out on revenue due to purchases moving online. That is because the tax rate for the SSUT is lower than the sales tax in most large jurisdictions. Additionally, the revenue from online transactions is being dispersed across the state on a per capita basis with no adjustment for where the order and delivery are occurring.  

The loss of revenue to a particular county can be estimated by first taking a county’s sales tax collections and estimating that county’s proportion of Alabama’s total sales tax collections.[1]

That proportion applied to an estimate for total online sales can be used to estimate that county’s portion of all SSUT-eligible spending. Finally, the county’s sales tax rate is applied to find the revenue the county would have received if the county’s tax rate was applied to online sales.

In fiscal year 2021 (FY 2021), Jefferson County received $14.2 million from the state from SSUT collections. That year, $6.4 billion was spent statewide on SSUT-eligible goods. According to PARCA calculations, in 2021, Jefferson County accounted for about 17% of the state’s total in-state sales tax collections. If Jefferson County accounted for 17% of SSUT-eligible spending as well, Jefferson County would have had more than $1 billion in taxable online sales. If Jefferson County’s countywide sales tax was applied to that total, the county would have collected $28 million in revenue from that online commerce.[2]

In FY 2021, Greene Country received $195,000 in remitted SSUT collections. Using the same approach applied to Jefferson, PARCA estimates that Greene County would have collected only $66,000 if it applied the county’s 3% rate to its estimated level of SSUT-eligible sales.

Another way to compare SSUT distributions and local sales tax is to take income into consideration. The current per capita distribution assumes that every person in every county spends similarly online. Since higher income is correlated with higher levels of spending, an income-weighted distribution might more closely approximate actual local spending patterns.

For instance, in FY 2021, Madison County received $7.2 million in SSUT remittance. If SSUT was distributed by income and population, PARCA estimates the county would have received $10 million in disbursements.

Figure 8. Top 5 Counties in SSUT Distributions

Cities

Questions about the SSUT’s distribution formula are most pressing for municipalities where brick-and-mortar stores tend to be concentrated. Higher sales tax rates and dependence on sales tax revenue make the issue especially contentious.

Since 2018, all municipalities have enjoyed this new revenue from online sales, with the amount received based on city population. However, municipalities with large populations and high sales tax contend they are losing out on revenue they would have received if the purchases had been subject to a local sales tax instead.

In FY 2021, Tuscaloosa received $4.8 million from the estimated $6.4 billion in SSUT-eligible statewide spending. PARCA estimates Tuscaloosa’s 3% tax on its portion of statewide sales would have yielded upward of $6.6 million.

In FY 2021, Hueytown received $860,000 from SSUT disbursements. That year, it accounted for roughly 0.33% of the state’s sales. If Hueytown had received their 4% tax on that proportion of the SSUT sales, it is estimated they would have received a slightly lower amount: $856,778.

Hueytown represents a middle ground of municipalities that receive similar collections in both methods. The smaller the sales tax collections, the greater the difference between what they would have collected and what they received.

Many municipalities have less sales tax revenue than Hueytown, and many are probably receiving twice what they would have collected from sales tax.

While this distribution method might seem inequitable, it is worth considering the flaws of traditional sales tax.

Sales taxes are paid at the point of sale. This means that the Alabamians flocking to cities with high sales tax for retail are not only paying above their dwelling municipality’s sales tax, but they are also paying into the budgets of a different municipality altogether.

Figure 9. Top 11 Cities for SSUT Distributions

School

The SSUT and its distribution system also have an impact on school budgets. School systems receive sales tax money, collected and distributed according to local law or flowing through the county or municipal government. Presumably, as sales shift online, that revenue is diminished. The taxes from those online transactions, collected through the SSUT, are distributed to cities and counties. Unlike sales taxes, local governments are not obligated to pass along a portion to the schools.    

In 2021, 187 school systems received revenue from county sales tax (totaling $665 million), and 40 school systems received revenue from city sales taxes (totaling $176 million).

Some cities treat the SSUT as if it were sales tax and distribute it to the schools in the same proportion as the traditional sales tax. Some school systems have negotiated agreements to receive a portion of the SSUT. Many have not.

The Alabama Department of Education asks school systems to report local sources of revenue. This reporting may not completely capture whether or not SSUT funding is flowing to the systems, but far fewer systems report receiving SSUT funding than report receiving traditional sales taxes. As of December 2022, only eight school systems reported receiving funding from their county’s SSUT revenue, and only seven school systems reported receiving funding from their city’s SSUT revenue, according to Alabama Department of Education records.

SSUT’s Unintended Consequences in the Marketplace

SSUT decisions also impact brick-and-mortar businesses. The SSUT’s low rate of 8% allows out-of-state vendors to charge lower prices than their in-state competitors.

Brick-and-mortar businesses employ more people and contribute to the local economy in various ways, including through the payment of rent or property tax. And yet they are compelled to collect a higher combined sale and local sales tax rate than an online seller.

Small businesses in Alabama are obligated to collect and remit sales taxes, whatever their sales volume. Out-of-state online businesses that sell less than $250,000 to Alabama customers are not obligated to participate in SSUT.

There are also situations in which local businesses could find an advantage in selling through a third-party, online marketplace facilitator and thus avoid paying local taxes. The online transaction could be facilitated through an online marketplace, assessed the 8%. The customer can then pick up the item at the store or have it delivered to the home, circumventing local sales taxes.  

Alternatively, some Alabama residents are, at least in theory, overpaying sales taxes on online transactions—Alabama residents who live in jurisdictions where the sales tax is lower than the 8% SSUT.

The Alabama Department of Revenue does have a process in place to reimburse residents living in these jurisdictions. The process involves filing a claim with documentation of purchases. The Department does not report how much has been claimed through that process.  

Still, even if a rural resident pays the SSUT on a transaction, it is not necessarily true that they are suffering an injustice. If that rural individual were to instead purchase the same item in a physical store, that store would likely be located in a jurisdiction that collects 8 cents or more in local taxes, since most retail stores are located in cities with sales taxes.

If Alabama wanted the SSUT to match the local sales tax, it would need to make sure a replacement system doesn’t impose an “undue burden on interstate commerce.” The opinion of the court gave little detail about what is burdensome, but it expressed that what South Dakota had set up “appear(s) designed to prevent…undue burdens upon interstate commerce” and that it would be up to Congress to decide. Despite this, there are cases going on in Louisiana and Colorado that might force the courts to give more guidance.

It is currently unknown what constitutes an undue burden, but it gets even harder to anticipate what that will look like as new technology emerges. In the Quill era, finding local rates in different states and remitting the correct amount was a huge burden. Nowadays, it has been made much simpler by the creation of easy-to-use databases and automated processes.

Currently, Alabama’s SSUT is less burdensome than most other policies. This means that our policy will not likely conflict with a future ruling. The implication for Alabama is that we could probably afford a more complex and demanding policy that might fix some of the problems discussed in this report.

Policy Alternatives

Alabama Simplified Sellers Use Tax has plenty of fans, and, for the time being, it will likely remain as it is.

It is simple—one uniform rate statewide, collected by one entity, the State of Alabama. This simplicity decreases the cost of compliance for businesses and the cost of collection for the state. It also encourages participation in the system, which otherwise could be difficult to enforce.

For smaller jurisdictions that lack commercial activity, it has created a revenue stream where none existed. For counties, always cash-strapped and lacking independent authority to levy a tax, the SSUT has been a boon.

But if the concerns of brick-and-mortar retailers and larger cities and counties are to be addressed, there are policy options.

Option 1: Level the playing field between online sellers and brick-and-mortar stores

The current SSUT rate of 8% online purchases is lower than the state average sales tax of 9.24%.[3]

That gives online vendors an advantage over brick-and-mortar stores. The difference is even more significant in some of the larger municipalities, with sales tax rates on in-person purchases reaching 10% in Birmingham, Montgomery, Mobile, and Tuscaloosa.

Table 1. Sales tax rates for top 10 cities, sorted by combined sales tax rate

Argument for: This option would maintain the simplicity of the SSUT for online sellers while leveling the playing field. This approach is the simplest to achieve politically and would benefit all the recipients of the SSUT. It would lower the incentive for companies to remain out-of-state or migrate transactions to an online third party.

Argument against: Raising the rate does not address objections to the current distribution system, which does not align with the level of commercial activity or wealth in a community. As currently structured, the SSUT is more of a statewide revenue-sharing mechanism than a local tax. Additionally, for residents of low-tax jurisdictions, the tax on online goods would be much higher than in their home jurisdictions. Raising the rate also does not address the plight of school systems losing out on local sales tax.

Option 2: Equalize other terms between online and in-person sales   

Currently, a remote business that generates less than $250,000 in revenue annually does not have to collect and remit SSUT. Notably, this threshold is more than double the typical threshold of $100,000 in force in other states. More importantly, there is no similar threshold for brick-and-mortar stores subject to normal sales tax. This gives small online retailers a considerable advantage over their local competitors.

Argument for: An adjusted threshold would bring Alabama more in line with the majority of states in terms of capturing sales taxes from online transactions, and changes could level the playing field with Alabama-based sellers. The amount of SSUT collections would increase, and all the recipients of it would benefit.

Argument against: The adjustments would impose a burden on smaller Internet-based companies in terms of compliance. It would not address the disbursement method for those who want it changed. It doesn’t help local schools that lose out on local sales tax.

Option 3: Apply to all purchases, online or in-person, the appropriate state and local taxes for the jurisdiction

Alabama could require online sellers to calculate and pay the sales tax based on where the order is being delivered. That would require that Alabama provide a system for cataloging, geocoding, and communicating the appropriate rates. And it would likely require localities to give up control of the tax collection and administration process.    

Perhaps, the easiest route would be to join the 24 states, including Georgia, North Carolina, Kentucky, and Tennessee, in adopting the Streamlined Sales Tax, a multistate cooperative system for simplifying the assessment and payment of sales taxes. The participating states agree to a set of common rules and definitions and provide up-to-date information on sales tax rates and the precise geographic areas where those rates apply.

The simplification effort was launched after the original Quill decision, which prohibited taxation across state lines because of the overwhelming complexity of determining local sales tax rates and rules in the multitudes of jurisdictions across the country. Since then, cooperating states have been supported by businesses interested in simplifying compliance and payment. Like the SSUT, the Streamlined Sales Tax initially offered a simplified and voluntary way to pay taxes on online sales.  

The drive to simplify and the evolution of technology helped pave the way for the Wayfair decision, which allowed states to require online vendors to collect sales tax. In the Wayfair case, the Supreme Court reversed Quill, recognizing that South Dakota, a participant in the Streamlined Sales Tax effort, had created a system in which Wayfair was no longer facing an “undue burden” complying with the taxes state and local governments levied.

Remote companies who want to sell to participating states must register with the Streamlined Sales Tax Governing Board Companies and then can use the database (provided by the state to the Streamlined Sales Tax Governing Board) of locations and tax rates. The collections are sent directly to a single state entity and then distributed to the areas from which they were collected.

Alabama has traditionally been resistant to having one entity, presumably the State Department of Revenue, administer taxes on behalf of all local governments. In fact, Alabama, Alaska, Arizona, Colorado, and Louisiana are the only states that allow complete home rule over sales taxes.[4]

That resistance to state collection and distribution is one of the reasons why Alabama has not joined the Streamlined Sales Tax organization. If Alabama joined, municipalities could still set their own sales tax rates, but they would lose control of aspects of tax administration. A centralized system for filing and payment of sales taxes would be required. Cities require returns submitted to individual jurisdictions or audit businesses they suspect are not paying their fair share. Certain definitions and schedules would need to be uniform.

Alabama’s SSUT avoids the complexities that would have resulted if Alabama allowed municipalities to tax online sales. Louisiana and Colorado both have notoriously complex home rule local sales tax systems. Both states are facing lawsuits from companies that claim the complex system is too hard to comply with and places an undue burden on remote sellers. If Alabama were to adopt a system in which local sales tax rates were assessed on online transactions, the state would be wise to adopt a unified and simplified system for administering it.

Argument for: Bringing local sales tax rates and online sales tax rates into conformity would create a level playing field and would allow local communities to set rates and benefit from the economic activity within their borders. Local transactions would support local priorities.

Argument against: Alabama would need to have a sole entity collect sales taxes and oversee sales tax auditing. Local governments would lose some aspects of control. Alabama would need to create and maintain a centralized database of all the sales tax rates and their respective boundaries. Compliance would be more complex for online sellers. The equalized distribution of tax resources produced by the SSUT would be eliminated and replaced with a system that perpetuates the concentration of wealth and economic activity.

Conclusion

The Simplified Sellers Use Tax was a good step in a direction many states still have not attempted. Its simplicity and low-rate prioritized compliance did not require much coordination. It enticed online sellers to participate, providing advantages at a time when collection and payment of online taxes were voluntary.

Since the SSUT was adopted, remittance is now mandated. The amount of money spent online has exploded, and with it, the consequences of the SSUT’s setup.

Currently, many brick-and-mortar stores must charge higher prices to cover higher tax rates. Large municipalities and counties miss out on critical sales tax revenue, and schools lose out on local sales tax revenue. Meanwhile, smaller counties and municipalities are receiving a substantial amount of money from SSUT distributions. The effects of this policy are somewhat hidden behind our recent windfall of federal money and general economic surge, but they will become more pronounced when we are strapped for cash.

Whether a change to the Simplified Sellers Use Tax comes this session or in the next few years, it will likely come. It could come as a small rate change, an adjustment of distribution, or perhaps a major overhaul of sales tax as we know it. Even after such a step, the Wayfair decision set in motion a technological and political conundrum that will not soon be solved. Ongoing litigation will more clearly establish what constitutes an undue burden in the collection of Internet sales taxes. This will change how much governments can ask of businesses, but evolving technology will also make that mark a continually moving target.

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[1] A certain portion of the sales tax is not attributable to a particular county. That pool of sales tax revenue is not considered in this calculation.

[2] Jefferson County’s traditional countywide sales taxes flow not just to the county commission but to multiple agencies as designated by law. As in other counties, the SSUT distributions in Jefferson are sent to the county commission.

[3] Fritts, “State and Local Sales Tax Rates,” accessed March 22, 2023, https://taxfoundation.org/publications/state-and-local-sales-tax-rates/.

[4] Gail Cole, “Economic Nexus, Home Rule, and Sales Tax: What Businesses Need to Know,” Avalara, Inc., accessed April 11, 2023, https://www.avalara.com/blog/en/north-america/2022/07/economic-nexus-home-rule-sales-tax-what-businesses-need-to-know.html.

PARCA’s How Alabama Taxes Compare, 2022 Edition, uses data published by the U.S. Census Bureau’s Annual Survey of State and Local Finances to compare tax revenues across the state. This most recent set of revenue and expenditure data cover state and local fiscal years ending between July 1, 2019, to June 30, 2020, identified as the fiscal year 2020. That means the state of Alabama’s data is from the fiscal year that ended September 30, 2019.

Key Findings

• In 2020, Alabama had the nation’s second-lowest state and local tax collections per capita.

• Alabama has the lowest per capita property tax collections in the nation.

• Alabama has among the highest sales tax rates in the U.S.

• Alabama is now the only state that allows state individual and corporate income taxpayers to fully deduct federal income taxes paid. That provides a tax advantage for high earners.

• Despite a recent change that provides some relief, Alabama begins taxing income at the lowest threshold in the U.S.

Alabama state and local taxes collections are low due to two factors: lower rates and a smaller resource base to tax. Alabama’s Per Capita Gross Domestic Product, the total value of all goods and services produced, ranks in the bottom five of states, meaning we have a lower resource base to tax. However, these other states make a greater tax effort and, thus, generate more money to provide services.

This gap between Alabama and other states will not be so obvious when newly elected lawmakers convene in March to craft budgets for FY 2024. A strong inflationary economy, high employment levels, and a flood of federal relief have supplemented state spending and stimulated record levels of state and local tax collections in the most recent year.

But as proposals are floated to make changes to tax rates, it’s important to understand the tax system in context, including a history of underinvestment compared to other states. Any changes should ensure adequate revenue, promote fairness and opportunity, and increase ease of collection and compliance.

How Alabama’s Taxes Compare, 2022 Edition, explores Alabama’s tax system in more depth and context.

Printable PDF version available here

Below are interactive versions of the charts in the report.

Alabama tax collections grew at an eye-popping rate in the 2022 fiscal year, with particularly strong growth in income tax collections (up 27% over 2021) and online sales (up more than 20%). The strong collections produced surpluses in both primary state accounts, the Education Trust Fund (ETF) and the General Fund (GF).

Printable PDF available here

While the growth is sparking talks of rebates and tax cuts, it will be important for legislators to keep in mind that inflation will increase the cost of operating state government. At the same time, rising interest rates and diminishing levels of federal relief will likely slow growth going forward.

Alabama has had a string of record years when it comes to tax collections, with no discernable drag caused by the pandemic shutdown and the subsequent recovery. Preceding the pandemic, Alabama experienced historically low unemployment and was beginning to increase labor force participation rates, drawing discouraged workers off the sidelines and contributing to income gains.

While the pandemic sent a sudden jolt through the economy, federal relief kept paychecks coming for many and provided stimulus money to households as well. Alabama’s dip in the second quarter of 2020 wasn’t as sharp as some states, and the economy reopened more quickly than some.

In FY 2021, the continued federal stimulus and the recovering job market produced record growth in tax collections. And in FY 2022, total collections grew even faster, 18% across both funds, with the strongest growth in the Education Trust Fund.

The Education Trust Fund

The ETF receives the receipts of state sales and income tax, plus a handful of other revenue streams.

Income and sales tax collections rise with a growing economy and can shrink when the economy contracts and goes into recession. Inflation, which has averaged below 3% over the past 20 years, averaged over 7% during 2022. Since people spend more, sales taxes rise, and tax collections also grow.

Income taxes

At the same time, during FY 2022, there was a strong demand for workers, with historically low unemployment. To attract and retain employees, employers increased wages. Alabama’s workforce returned to and exceeded pre-pandemic numbers in FY 2022. Alabama’s labor force participation rate is still 5% lower than the U.S. rate, but the strong job market has drawn more people back into the labor force.

During FY 2022, the number of people working in Alabama surpassed pre-pandemic peaks, though that didn’t occur until July 2022.

With more workers receiving higher pay comes higher income tax collections. The income tax receipts were up 27% in FY 2022, contributing a total of $7.2 billion to the ETF, up $1.5 billion from 2021. And 2021 wasn’t a down year. Income tax collections increased 21% in 2021. Even in FY 2020, the fiscal year that included the pandemic contraction, income tax collections rose almost 7%.

Rising income tax collections resulted from a variety of factors. In addition to rising wages, corporate profits have been, and continue to be, high. Alabama corporate income tax collections were up 33% in 2022, an increase of $325 million over FY 2022.

Another likely contributor to the substantial 2022 collections was stock market gains in 2021, a year in which the S&P 500 was up by 27%. Taxes on those gains would have flowed in during the 2022 fiscal year.

Considering the poor stock market performance in the 2022 calendar year, revenue from that source will be down in Fiscal Year 2023.

A final contributing factor to the growth of income tax collections is the return to a normal level of auditing by the government after pandemic-related restrictions on face-to-face interactions slowed those efforts. Some of the gains may be attributed to settlements from prior years and increased compliance in the current year.

Sales taxes

Meanwhile, state sales tax collections were up 7.66%. Inflation over the period is estimated to have been 7.7%. The state makes some adjustments to the sales tax before making a final deposit in the Education Trust Funds, which slightly decreased the percentage gain to the Education Trust Fund. Ultimately, revenue from sales taxes flowing to the ETF increased 6.8%, or $159 million. The Use Tax, a companion to the sales tax but assessed on out-of-state purchases of goods and machinery, was up 18%, contributing an additional $35 million to the ETF.

The state portion of the Simplified Sellers Use Tax (SSUT), a tax on online purchases, was up 21%, suggesting a continuing migration toward online shopping. Overall, the SSUT brought $311 million, but 75% of the proceeds went into the General Fund. The SSUT contributed $78 million to the ETF, $13 million more than in 2021.

Overall, the Education Trust Fund grew 21%, an increase of $1.78 billion, with total collections at $10.42 billion.

Because of the Rolling Reserve Act, the ETF is budgeted conservatively, with spending capped by a formula. That formula computes a historical growth rate for the fund, keeping lawmakers from overspending in periods of high growth and preserving funds for lean times. It more than did its job in FY 2022. The ETF bought in $2.75 billion more than the state budgeted for education spending in FY 2022.

When the Legislature convenes in March of 2023, the body will decide what to do with that surplus. While some are proposing tax rebates or cuts, others are urging caution.

The massive injection of federal aid for education, which amounts to over $3 billion over three years, will be tapering off in 2024. Teacher compensation will need to increase to keep pace with inflation and to attract young people into the profession. Regardless, the state has healthy reserves and has continued to budget conservatively with state funds. The FY 2023 ETF budget calls for spending $8.3 billion out of the ETF, $2 billion less than what was collected in FY 2022.

The General Fund

The General Fund also grew, but not at the same rate. This has been typical of the General Fund compared to the Education Trust Fund performance pattern. The Education Trust Fund grows fast when the economy grows, while the General Fund sees a slower growth rate. The General Fund is made up of a hodgepodge of revenue sources. It supports the operation of all the government’s non-education agencies, including Medicaid and the state prison system.

The Legislature has made several adjustments in recent years to increase growth in the General Fund. That’s important because expenses inevitably rise. Not only that, the state has chronically underinvested in some supported by the General Fund, the Department of Corrections, for example. A stable, growing revenue base is needed to address longstanding needs.  

Simplified Seller’s Use Tax

The most successful of those adjustments was the establishment of the Simplified Sellers Use Tax (SSUT). The Legislature chose to devote 75% of this tax on Internet sales to the General Fund, which has been one of the state’s fastest-growing revenue sources. The move continued to pay dividends in Fiscal Year 2022.

Revenue from the SSUT was up 21%, an increase of $40 million, for a total contribution to the General Fund of $233 million.

While it continues to grow rapidly as more commerce moves online, the SSUT’s growth rate is slowing. Between 2019 and 2020, revenue from the SSUT doubled, then grew by almost 40% in 2021. In the first years of the tax, revenue grew quickly as vendors who previously hadn’t collected online sales taxes joined the system. Digital commerce also grew especially quickly during the pandemic. The shift toward digital commerce will continue, but revenue gains won’t likely advance as rapidly going forward.

Other sources

Insurance company taxes also provided a major boost to the General Fund in 2022, up 13% or $65 million more than it did in FY 2021. The tax is assessed on the value of insurance premiums issued. The Insurance Company tax is the largest tax source in the General Fund at $554 million in FY 2022. Before FY 2021, $30 million of the Insurance Company Tax was transferred to the Education Trust Fund. That has ended, providing more support for the General Fund.

The Use Tax, at $272 million, was the second largest contributor to the General Fund. This is a tax on purchases of cars, machinery, boats, mobile homes, or other goods in other states for use in Alabama. A 2015 change in the distribution formula for the Use tax has allowed a greater portion of the tax to flow to the General Fund. In 2022, revenue to the General Fund from the Use Tax increased by 18%, providing an additional $35 million than in 2021.

Rising interest rates increased revenue from the interest earned off State deposits. Revenue doubled, increasing by $20 million to $40 million.

Higher energy prices boosted the tax revenue from Oil and Gas Production taxes, up by 80%, an increase of $17 million.

Total growth in the General Fund increased 8.4%, a slightly higher rate of increase than the inflation rate during the period. Total collections increased from $2.56 billion to $2.87 billion, up $31 million. By the end of 2022, receipts to the General Fund were $351 million above FY 2022 budgeted expenses. The Legislature anticipated the surplus and applied it to the 2023 budget.

The Big Picture

The revenue flowing into the General Fund and the Education Trust fund presents only a portion of the state government spending in Alabama. In addition to the taxes earmarked for the Education Trust Fund and the General Fund, other state revenue streams flow directly to agencies. For example, taxes on motor fuels flow to the Alabama Department of Transportation for highway building. State colleges and universities collected tuition. Federal funds help pay for highways, Medicaid, education, and social services.

About half of Alabama’s public spending is for education, and half is for non-education agencies.

Rainy Day

If a recession does cause a contraction in revenues, Alabama is in a better position to weather a downturn than in the past. According to a recent analysis by Pew Charitable Trust, Alabama has the 20th strongest reserves, with $1.4 billion stashed away in Rainy Day Funds. According to Pew’s calculations, Alabama could run 49 days on the amount it has in reserve.

With elections for governor and legislature pending in the fall, Alabamians are united in support for public investment in education and healthcare, divided on how to raise money for new investments, and express a preference for local leadership and decision-making. That is according to PARCA’s annual public opinion survey.

The poll of over 400 Alabama residents was conducted by Dr. Randolph Horn, Samford University, Assistant Vice President for Enrollment Research and Professor of Political Science. 

Results from this year’s survey are consistent with previous years’ results in some important ways.

• Alabamians continue to rank education as the most important state government activity.
  

• Large majorities of Alabamians say the state spends too little on education and healthcare.
  

• Alabamians have an aversion to taxes but say upper-income residents pay too little.
  

• A slim majority say budget surpluses should be reinvested in state services, specifically education, rather than used to cut taxes.
  

• If budget surpluses are used to cut taxes, the most popular tax cut is the sales tax on groceries.
  

• Alabamians are willing to pay more taxes to support education but do not agree on which taxes should be increased.
  

• Alabamians are essentially split on tax-funded vouchers to pay for private school tuition. However, a majority believe vouchers, if allowed, should be available to all students.
  

• Alabamians continue to believe that they have no say in state government and that government officials in Montgomery do not care about their opinions.

Results of the survey indicate many opportunities for officials to demonstrate responsiveness to public concerns and leadership in crafting public policy solutions.

Download the full report here.

Nor does Alabama have an effective system for publishing and sharing the kind of comparable data that could be produced with a uniform chart of accounts.

For instance, North Carolina, Georgia, and Florida have a statewide reporting system that makes city and county financial information available online in a downloadable format that allows for detailed comparisons between peer cities or counties.

If Alabama wants to gather this data and equip its cities with a tool for comparison, the U.S. Census Bureau’s Annual Survey of State and Local Finances provides an existing base of information already submitted by city governments.

In terms of tax collections, an analysis of the most recent data from the Census survey finds:

1. Alabama cities heavily depend on sales tax, with almost 60% of revenue coming from that source.
2. Of cities with populations more than 20,000, per capita tax collections range from $2,674 in Homewood to $402 in Prichard.
3. Oxford has the highest per capita sales tax revenue at $1,502 per resident.
4. Mountain Brook is the only city in Alabama to collect more in property taxes than in sales, with 46% of municipally collected revenue coming from the property tax.
5. Birmingham leads the cities in occupational and business licenses taxes per capita, with that revenue contributing 42% of city tax revenue.

Meanwhile, on the expenditure side, the survey reveals:

1. The governments in North Alabama spend more than governments in the rest of the state because they operate public utilities, including municipal electricity providers.
2. Excluding utilities, Birmingham and Bessemer, both cities that receive an influx of commuters, spend more per capita on the broad range of municipal services. That includes topping the list for per capita spending on police and fire.
3. Oxford tops the list in per capita spending on parks and recreation. Smaller cities that report the operation of municipal sports, arts, and recreation facilities rank high in this category.
4. The data offers the potential to track spending on municipal courts, jails, solid waste disposal, and other categories of spending, but currently, cities appear to diverge widely in how they report that information in the survey.

Working with state officials and with assistance from the U.S. Census Bureau, Alabama local governments could develop a more streamlined system for generating and reporting this data. With closer agreement on how to categorize particular revenues and expenditures, the survey could provide clearer, more actionable comparable data. The survey includes questions on debt. Better reporting of this data can provide more transparency to the public. A more robust system could also provide better accountability and oversight, potentially avoiding bankruptcy and scandal.

However, it will take leadership, likely by state officials, to gather consensus and execute a system cities, counties, and other local entities are motivated to participate in.

Read the full report here: How Alabama Taxes Compare, 2022 Edition

Expanding Medicaid coverage in Alabama could save the state almost $400 million per year over the next six years – more than enough to cover the cost of expansion – and have an average positive economic impact of $1.89 billion per year over that same time frame.

These findings are based on analysis conducted by the Public Affairs Research Council of Alabama and the Center for Economic Development and Business Research at Jacksonville State University.

The analysis was supported by the Daniel Foundation of Alabama, the Community Foundation of Northeast Alabama, the Community Foundation of Greater Birmingham, the Mike and Gillian Goodrich Foundation, and the Women’s Foundation of Alabama.

Medicaid is a federal healthcare program administered by the states. The federal government funds approximately 71% of Alabama’s current Medicaid costs. The state’s General Fund covers the balance.

Medicaid covers approximately 925,000 Alabamians – the majority are children. Low-income adults are only covered if they are caretakers of someone under 19, pregnant, over 65, legally blind, disabled, or in a nursing home. The income limits vary by program but can be very low. For example, the income threshold for a caretaker is 13% of the federal poverty level or $3,445 per year for a family of four.

Since 2014, states have been able to expand their Medicaid programs to cover adults earning up to 138% of the federal poverty level, $36,570 for a family of four. Initially, the federal government would cover 100% of the cost. From 2018 onward, the federal government covers 90%.

Alabama is one of 12 states which have chosen not to expand Medicaid. If Alabama chose to expand Medicaid, this would extend access to coverage to more than 280,000 people. The state would be responsible for 10% of the cost. Policymakers have expressed concern about the state’s ability to cover these increased costs – a reasonable concern given the troubled history of the state’s General Fund.

However, recent changes to federal law, including those in the various COVID relief packages, change the equation.

Our analysis finds that over the next six years, expanding Medicaid in Alabama could:

• extend coverage to as many as 283,636 people.
• create an average of 20,083 new jobs per year.
• have an estimated positive economic impact of $11.36 billion.

Our analysis estimates covering that expanded population through Medicaid would cost an average of $225.4 million per year. However, expansion would result in the federal government paying $397.88 million in annual expenses currently paid by the state. As a result, the state could expand coverage, and at the same time, reduce or reinvest the amount paid to support healthcare for low-income Alabamians by $172 million annually.

Read the full report.

Alabama had the nation’s second-lowest tax collections per capita in 2019. Only Tennessee had lower state and local tax revenue per resident than Alabama.

Since the early 1990s, Alabama had the lowest tax collections in the U.S. But beginning in 2018, tax cuts in Tennessee and economic growth in Alabama caused Tennessee to dip below Alabama in per capita collection.

During the period, Alabama’s economic growth has been strong. Between 2018 and 2020, per capita personal income in Alabama grew faster than it did in Tennessee. By late 2019 Alabama was experiencing its lowest unemployment rate ever. On top of that, the state’s labor force participation rate had improved, bringing more workers into the workforce. Meanwhile, Tennessee is in the process of phasing out what remains of its small income tax. It has also reduced its sales tax rate on groceries.

Despite outpacing Tennessee, Alabama still trails far behind other Southeastern states in the amount of state and local taxes collected per resident, which partially explains why Alabama struggles to provide the same level of public services as other states.

PARCA’s 2021 edition of How Alabama Taxes Compare describes Alabama’s tax system and how it compares with tax systems in other states, based on the latest data available from the U.S. Census Bureau and the Bureau of Economic Analysis.

In addition to the PDF version of the report, the interactive charts below allow you to explore the data on your own. For better viewing, expand to the full-screen view by clicking on the button on the bottom right of the display below. Navigate through the story of Alabama taxes using the tabs at the top of the interactive display.

Read the Print version.

By the end of FY 2021, Alabama tax collections had grown at their fastest pace in recent history, fueled by economic recovery from pandemic shutdowns and by unprecedented injections of federal stimulus for governments, businesses, and individuals.

For the fiscal year that ended September 30, both the Education Trust Fund (ETF) and the General Fund grew by more than 11%, compared to historical averages of 3.5-3.7% for the ETF and 2-2.25% for the General Fund. Alabama’s percentage gain in tax revenue since the pandemic crash ranks 7^th among the states, according to an analysis by the Pew Charitable Trusts.  The growth rates far exceed any year since at least 1995.

Printable Version

However, it is important to remember the growth comes in comparison to FY 2020, a year in which COVID shutdowns constrained growth. During FY 2021 (from October 2020 — September 2021), businesses were open throughout the year, though some were still affected by restrictions related to the virus.

The growth is also taking place in the context of rising inflation, meaning the revenue is based on higher prices, and the money collected won’t have the same purchasing power it previously did. Regardless, the growth was substantial.

The ETF took in $900 million more than in FY 2020, topping $8.6 billion. And that understates the gain. FY 2020’s total included over $300 million borrowed from the Budget Stabilization Fund for cash flow purposes. That money was returned to the fund later in 2020.

The General Fund took in almost $2.6 billion, an increase of $262 million over last year.

Where did the growth come from?

Based on estimates from the Federal Funds Information for States, Alabama budget analysts estimate that $30 billion in federal relief flowed to individuals and businesses in Alabama. In addition, $16 billion in federal relief was authorized and is in the process of flowing through the state out to agencies and local governments.

That extra money in the hands of consumers fueled spending. Gross sales tax collections increased almost 15%, driven by multiple rounds of economic stimulus payments to individuals and parents with children. Spending was also boosted by unemployment benefits, which provided roughly twice the minimum wage. For some laid-off workers, the benefits amounted to a raise. Aid from the paycheck protection program kept businesses solvent and employees on payrolls.

While the bulk of the sales tax is deposited in the ETF, the General Fund also benefited from the increased spending and changed consumer patterns. The Simplified Sellers Use Tax (SSUT), the tax on online sales, rose almost 40% over 2020 totals (and 2020 was 99% higher than 2019). The Legislature’s decision to deposit the bulk of the SSUT into the General Fund added a growth element to the General Fund that had been lacking. Instead of lurching from crisis to crisis, the fund has kept pace with the rising costs.

Gross individual income tax collections were also up, increasing 13%, despite the fact employment levels haven’t reached pre-pandemic highs. By the beginning of FY 2021, employment levels had rebounded to about 60,000 short of March 2020 employment. Since then, they have continued at that level. Meanwhile, wages have been on the rise as businesses seek workers in the face of a shortage of workers.

Surpluses and Temptations

Thanks to the additional revenue, the state covered the 2021 ETF budget and ended with a balance of $1.24 billion, which will be available for lawmakers when the lawmakers convene in 2022.

The General Fund ended with a surplus of $368 million, which has already been put to use, appropriated as part of the funding for new prison construction.

The surge in state tax dollars has come along with a surge in federal support for state government operations as well. In a typical year, federal funds provide almost the same amount the state raises in taxes. But with the pandemic, the U.S. government sent an estimated $17 billion in relief funding to Alabama to schools, hospitals, and other agencies. Some of that is flowing through the appropriation process, but much of it is flowing directly to the agencies, making it difficult to know whether it has been spent yet or not.

The danger comes when those federal relief funds dry up. Growth will taper. State agencies receiving federal relief cannot count on that level of funding to continue. Legislators will convene in 2022, in an election year, with a lot to spend. But they will also have to keep an eye toward an unpredictable future and not commit to unsustainable levels of recurring expenses.

Thus, it’s useful to look for clues in the FY 2021 collections.

General Fund Revenue Sources

A myriad of tax sources supports the General Fund. Traditionally, most of those sources saw little growth from year to year. The General Fund struggled to keep up with rising expenses in non-education expenses, like funding for prisons and the Medicaid program.

However, in recent years, some growth taxes have been added to the General Fund, and its rate of growth has been similar to the Education Trust Fund. Since 2017, General Fund receipts have increased 33%, while ETF receipts have increased 37%.

Big gainers

Insurance Co. Taxes: The largest tax in the General Fund, the tax on insurance premiums, contributed close to $500 million to the General Fund, increasing by $77 million or 19% over 2020 collections. As insurance rates go up, and as more people take out insurance, the tax brings in more. Also, $30 million of the tax had been going to the ETF. That ended with a law change in 2019, increasing the yield to the General Fund.

Simplified Sellers Use Tax: The SSUT continued a string of huge gains as the shift to online sales continued in FY 2021. An additional $55 million came in from this source, an increase of 39% over 2020 (In 2020, the increase was 99%). It has quickly grown into the third-largest source of revenue in the General Fund at $192 million. That represents 75% of the tax. The remaining 25% goes into the ETF. Some of the growth may be attributable to new retailers submitting the tax. Still, this year’s growth is likely attributable to both the increased spending power of consumers because of stimulus and rising wages and to the continuing shift to purchasing online for home delivery. Considering the decreased threat of Covid, the tax is expected to grow more slowly in the future.

Financial Institutions Excise Tax: Coming off a down year in 2020, this tax source jumped by $55 million, an increase of 156%. The big jump is attributable to a new law in 2019 that required banks to make payments quarterly rather than in a lump sum. It also changed how the tax amount due was calculated, bringing it more in line with the federal definition of taxable income. The big surge in collections was not expected, as the law changes were expected to be revenue-neutral. State budget officials think the shift in the schedule for payment of the tax may have resulted in a surge of revenue in FY 2021 will not continue.

Sales and Use Tax: a share of the sales tax on autos and boats is distributed to the General Fund, and each of those lines was up by more than $25 million, thanks to the strong demand and rising prices for both.

ABC Board: Liquor sales continued a rising trend posting a 12% gain over 2020, a year when ABC proceeds climbed by 14%. This may result from a continuing shift toward purchase for home consumption, as restaurant and bar operations continued to be somewhat curtailed in FY 2021. The revenue sent to the General Fund from the ABC sales increased to $157 million.

Mortgage and Deed Record Taxes: About $20 million additional came in through taxes related to home sales. Both prices and activity spike in 2021, reflected in a 34% increase in the mortgage tax, adding $15 million to reach a total of $58 million, and a 45% jump in the deed record tax, reaching $17 million. Continued low-interest rates led to more refinancing and home purchases.

Lodging Tax: This tax on hotels and vacation rentals was up 26% in 2021 after being down 15% in 2020, bringing in an additional $13 million compared to 2020. Gulf Coast rentals saw a record demand though some units were offline because of damage caused by Hurricane Sally in Sept. 2020. Convention and hotel traffic remained depressed compared to historic norms.

Interest on the Alabama Trust Fund: More accurately described as investment returns on the Alabama Trust Fund, the contribution from this source increased 8%, or $8 million, thanks to a strong market. Also known as the State’s savings account, the Alabama Trust Fund is at nearly full strength as amounts borrowed during previous downturns have largely been repaid.

Oil and Gas Production Tax: The oil and gas production tax was up 16%, recovering somewhat from a crash in FY 2020.

Court Costs: With the courts open again, court costs recovered some of the previous year’s drop, though FY 2021 collections were still behind 2019s. In FY 2021, proceeds from court costs contributed $60 million to the General Fund.

Big losers

Cigarette Tax: Though it remains a significant source of revenue, the cigarette tax continues to decline as smoking decreases. The taxes brought in $143 million to the General Fund in FY 2021, down by $5 million, a decline of 3%. Meanwhile, a Tax on Vapor products increased 28%, or $614,875, to $2.8 million.

Interest on State Deposits: The state earns interest on the cash it holds, but this source of revenue declined $31 million or 62% because of dropping interest rates. The state collected about $20 million from this source in 2021.

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, bringing in just over $11 million, down another nearly $4 million or 26% lower than last year.

Education Trust Fund

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

Benefiting from growth taxes, the ETF has traditionally seen the most substantial ups and downs: rapid growth in good times and jarring contractions when 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.

Big Gainers

Income Taxes: Net income tax deposited in the ETF was increased by a jaw-dropping 21%. The anemic growth of income taxes in FY 2020 is part of the story. FY 2021 full-year of full-time employment earnings produced a substantial gain in gross personal income tax collections, up $643 million to a total of $5.8 billion. But even more staggering was a 61% increase in corporate income taxes. Corporate income taxes increased $370 million to a total of $974 million. Explanations for such a large jump are not completely clear. Certainly, the recovering economy had businesses operating a full calendar year. Pent-up demand and the stimulus in the economy drove up sales bolstering income over a down 2020. Budget analysts also speculate that corporations may have realized more revenue in 2021 to avoid potentially higher federal taxes in 2022. After refunds and other adjustments, the income tax contributed $5.6 billion to the ETF, increasing $987 million over 2020.

Sales Taxes: The state received over $2.3 billion in sales tax revenue in 2020, and $325 million more than last year was sent to the General Fund, an 11% increase. Sales were robust at grocery and hardware stores as people continued to invest in home improvements. It’s also important to note that inflation has driven up the prices of some goods, which in turn drives up sales taxes, which are based on the total cost. With the dissipation of stimulus money, this pace of growth is unlikely to recur. But, with the pandemic under better control, activity continues to accelerate, Demand is strong. Unemployment is low, and wages are rising. That suggests income and sales taxes will continue to grow.

Simplified Sellers Use Tax: As in the General Fund, the contribution of this tax was up 40%, adding $18 million to the ETF, for a total contribution to the ETF of $64 million. The proceeds of the tax are divided, with the ETF receiving 25% and the General Fund 75%.

Big losers:

Insurance Premium Tax: Before FY 2021, $30 million from the Insurance Premium Tax was deposited into the Education Trust Fund. That ended because of a 2019 change in the law governing the distribution. The total amount is now in the General Fund.

The Utility Tax: Down 2% or $8 million, this is a tax on electric, water, telephone, and gas utilities. FY 2021 saw both a mild summer and winter and a wet one. That leads to decreased energy consumption and lower levels of water use. However, the extra rain provided more opportunities for hydropower generation, driving up receipts from the hydroelectric tax.

From the Year’s End Looking Forward

Both funds ended FY 2021 with substantial surpluses. FY 2022 budgets were built on the assumption of 3% growth over the 2021 budgets. Current conditions suggest the state should easily exceed those predictions.

Alabama is in an unfamiliar position of having to manage its way through unexpected excess revenue.

General Fund

• FY 21 Budgeted $2,393,272,863
• FY 21 Receipts $2,562,158,281
• FY 22 Budgeted $2,637,874,471

Education Trust Fund

• FY 21 Budgeted $7,217,422,487
• FY 21 Receipts $8,643,813,063
• FY 22 Budgeted $7,672,576,575

And that’s only part of the picture

The ETF and General Fund totals don’t even represent half the revenue that powers public agencies, state schools, universities, and hospitals. Nor does it represent the federal benefits that flow through state agencies like Medicaid, the Departments of Human Resources, Health, Mental Health, Labor, and Rehabilitation Services. The chart below gets closer to a picture of the scale of public spending in Alabama.

Reserve Fund Balances

Current conditions suggest continued recovery, But if things were to falter, Alabama has built up major reserves that are available to tap in case of an economic downturn. A recent analysis on state reserves and rainy day funds by the Pew Charitable Trusts estimated that Alabama $1.1 billion in rainy day funds or 11.2% of spending. The state could run on its rainy day funds for 41 days, Pew estimated. That puts Alabama well ahead of the 50-state median for the strength of its reserves.

• ETF Budget Stabilization: $448,410,575
• ETF Rainy Day: $484,979,764
• ETF Advancement & Technology: $282,314,668
• GF Budget Reserve: $75,303,255
• GF Rainy Day: $263,994,883

PARCA’s 2021 public opinion survey finds a growing majority of Alabamians support spending more on education but a lack of consensus on how to pay for the increase.

Among the findings:

Taxes

• 61% of respondents say upper-income Alabamians pay too little in state taxes. The percent of respondents who believe upper-income earners pay too little increased by 10% from 2020.
   
• 53% say lower-income earners pay too much, up from 40% in 2016.
   
• 49% say they pay the right amount of taxes, compared to 57% in 2016.

• Despite Alabama’s low per capita tax yield, 69% of residents believe they pay the same or more taxes than people like themselves in other states.

Public Education

Alabamians believe education is the most important service state government provides, but its lead over other services is declining.

• 44% rank education as the most important service, while 31.3% rank healthcare No. 1.

• 78% believe the state spends too little on education, compared to 74% in 2019 and 68% in 2013. Large majorities in every subpopulation have this belief.
   
• 69% support increasing taxes to support education, but no single tax increase option garners majority support.

• This year, respondents were asked what supplemental programs might improve education. No program received a majority response, but the top priorities were expanded tutoring, increased technology funding, and more mental health counseling.
  
  
• When asked what respondents’ top priority for new education funding would be, the highest percentage (41%) said that new revenue should go to increasing salary and benefits for teachers 
  
  
• 59% say local boards of education are best suited to decide how education dollars are spent.
  
  
• Respondents believe that the local board of education are best suited to decide school spending, school policy, and school closings.

Other notable education findings:

• 77% believe that taxes on Internet sales should be distributed to local schools in the same way as sales tax revenue from brick-and-mortar sales.
   
• Alabamians are almost evenly split on tax-funded vouchers to pay for private school tuition. However, 61% of Alabamians believe vouchers, if allowed, should be available to all students. 

Trust in State Government

Alabamians’ trust in state government improved slightly compared to 2019 but is still well below rates reported in the early 2000s.

• 77% support keeping the General Fund and Education Trust Fund separate, down from 80% in 2020 and 82% in 2019, but still well above the 69% reported in 2016.
   
• 63% believe state government officials do not care about their opinions, down from 66% last year. This compares to a low of 55% in 2008 and a high of 74% in 2010.
   
• 61% believe they have no say in state government, up from 55% last year, but well above the low of 43% in 2008.

Download the full report here.