How Alabama Taxes Compare, 2022 Edition

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.


Another Banner Year in Alabama Tax Collections, but Inflation Will Take a Bite

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.


A New Constitution Plus Additional Amendments on the Nov. 8 Ballot

Beyond the political contests on the November  8th ballot, Alabama voters will decide whether to adopt the Alabama Constitution of 2022, a recompiled version of the current constitution, as well as 10 statewide constitutional amendments. There will also be 19 other state constitutional amendments appearing on the ballots only in the county where those amendments apply.

Replacing the Alabama Constitution of 1901 has long been a goal of reformers. The current Constitution was adopted explicitly to guarantee White Supremacy in Alabama, by disenfranchising black and poor white voters, mandating segregated schools, and forbidding interracial marriage, among other provisions. 

Such unconstitutional and repealed provisions will be gone from the Alabama Constitution of 2022. The constitution would also incorporate and reorganize the 978 amendments that have been made to the current constitution.

At the same time, the new constitution would preserve current law and practices that centralize power in the Legislature and require amendments to the state constitution for even mundane local matters. If the Alabama Constitution of 2022 is adopted, Alabama will still have the world’s longest constitution: more than three times the length of the next closest state.     

PARCA’s new report, An Analysis of the Proposed Alabama Constitution of 2022 and the Statewide Amendments, details the proposal for the new constitution and the 10 amendments that will also be on ballots statewide.

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

Voters can find sample ballots on the Secretary of State’s website, listed by county.  The ballot language for the statewide and local constitutional amendments is also available on the site. Background material on the proposed Constitution can be found on the website of the Legislative Services Agency.

PARCA, Leadership Alabama, and Samford hosted a discussion of the proposed constitution Oct. 18, and a video recording of that event is available online.

Read the full report here.



Alabama Public Opinion Survey 2022

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.


2021 Population Change in Alabama Cities

Each year, PARCA analyzes population estimates issued by the U.S. Census Bureau. Visualizations of the population estimates and change for the state, counties, and metro areas can be found on our data dashboard. The estimates release covers cities and towns and their population changes between July 1, 2020, and July 1, 2021. For additional perspective, see coverage of the estimates by al.com.

During this period, international migration was effectively shut off. The influx of new residents from overseas had been a primary driver of population gain in the larger established cities. Meanwhile, this period also saw elevated mortality rates due to the pandemic. Also, due to the pandemic, cities across the nation saw an outflow of residents as businesses stayed shuttered and workers were asked to work from home.

Printable PDF version available here

Birmingham’s population dropped by 2,558, more than any other Alabama city. It was followed by Mobile, which was down 1,459, and Montgomery down 1,341. With an estimated population of 197,575 in 2021, Birmingham is now the state’s third-largest city, behind Montgomery at 198,665, and No. 1 Huntsville, at 216,963.

Huntsville bucked the trend of large city population loss, adding 1,920 residents according to the estimates. Only Auburn added more, 2,135, which was more population gain than any other Alabama city. Since 2010, Auburn’s population has increased 43%, the fastest rate of growth among cities over 20,000. Neighboring Opelika has also grown, adding an estimated 465 in 2021.

Both Auburn and Huntsville have been spreading out through annexation, adding undeveloped land where housing is now being built. At 218 square miles, Huntsville is now far larger than Birmingham at 147 square miles.

Add up the growth totals in Baldwin County, and you’ll see why the coastal county is No. 1 in numeric growth among Alabama counties. The estimates show Foley adding nearly 1,500 residents, Daphne more than 1,000, and Fairhope and Gulf Shores over 500 apiece.

The Birmingham-Hoover metropolitan area is still far larger than the next largest metro, Huntsville, with around 500,000 residents compared to Birmingham-Hoover’s 1.1 million. Over the past two decades, population growth around Birmingham has occurred chiefly in its suburbs.

However, according to the 2021 estimates, some traditional growth engines were idling. Trussville only added 172 new residents, and Hoover saw a net decrease of 98 residents. Homewood, Mountain Brook, and Vestavia Hills saw population declines. A bright spot for Jefferson County was Gardendale which posted a gain of 407. The growth in the Birmingham MSA occurred farther out in Shelby and St. Clair County. Calera added 742 residents; Chelsea, 478; and Helena, 465. Pell City, Moody, and Margaret town in St. Clair County also added residents. Nearby, Tuscaloosa added 658 residents and broke over the 100,000 population mark, coming in at 100,618.

Across a region, the biggest population gains were in north Alabama. In addition to Huntsville’s growth, Athens, in Limestone County, added over 1,300, and the City of Madison almost 1,000. Nearby, The Shoals added 424 residents, with growth in both Florence and Muscle Shoals continuing a positive trend. Across the entire northern tier of the state, almost all the cities and towns showed growth.

Southeast Alabama around Dothan saw modest growth, with Enterprise leading the way by adding over 500 new residents.

Anniston and Gadsden, however, continued a flat to declining population trend.

More broadly, most cities and towns in rural Alabama, from Northwest Alabama, through the Black Belt, and East Central Alabama, lost population.


State Parks Constitutional Amendment on May Primary Ballot

When voters go to the polls on May 24, they will be asked to vote on a single amendment to the Alabama Constitution of 1901, a proposal to borrow $85 million to pay for repairs and upgrades at Alabama’s 21 state parks.

Click here to read a detailed description and analysis of the proposed amendment.

Alabama has what is believed to be the world’s longest constitution at over 400,000 words, with 977 amendments. Oddly, 70% of the state constitution consists of amendments that apply to individual counties or cities. Alabama’s 1901 Constitution severely constrained government and consolidated power in Montgomery. The multitude of amendments is a long-lingering aftereffect of that approach to governing.

Having just one amendment to vote on is unusual. In November’s general election, 29 amendments will be considered, including amendments that would strike unconstitutional provisions and substantially reorganize the document.


PARCA Report Highlights Challenges of Municipal Financial Comparison, Examines City Tax Collections

Our 2022 edition of How Alabama Cities Compare (the tenth edition of PARCA’s study of Alabama city finances) introduces a new methodology, highlights the challenges of comparing municipal finances, and proposes a better way to collect the information in a standardized way that should produce comparable data more quickly. After building consensus and adjusting existing practices, such a system would save cities time and provide the data they need to manage their affairs.

Understanding a city’s revenues and expenditures in comparison to other cities is a fundamental tool for effective management.

By benchmarking against neighbors, a city may discover it is spending more than necessary. Alternatively, city leaders may conclude that a higher level of investment puts the city at a competitive advantage, providing a higher level of service and better quality of life for residents.

Unfortunately, making such comparisons is difficult in Alabama. Unlike other states, cities in Alabama are neither required nor encouraged to use a uniform chart of accounts, a standard system for coding revenues and expenditures.

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


The Economic Impact of Expanding Medicaid in Alabama

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.


How Alabama Taxes Compare, 2021 Edition

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.


Alabama Tax Revenues Surge in 2021

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 7th 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