Report: Alabama’s low tax collections hurting education, government services

Alabama’s tax collections remain among the lowest in the nation, making it harder for local governments to fund education and other services, according to a recent report from the Public Affairs Research Council of Alabama (PARCA).

The report found that while Alabama’s overall tax collections grew in 2023, it was still near the bottom of the nation for collections, beaten only by Tennessee and Mississippi, which have cut taxes in recent years.

Thomas Spencer, one of the authors of the report, said in an interview Tuesday centuries-old tax restrictions and poverty both played a role.

“We have citizens that don’t have as much income, so higher rates of poverty in our state and so we have less wealth to tax,” he said.

The state also has the lowest property tax rate in the nation due to property tax caps first introduced in the 1875 Constitution and tightened in the 1901 Constitution, which took the vote away from Black Alabamians and poor whites. Collections were further limited by the lid bills in the 1970s, which capped property assessments.

The report said that low property taxes help farmers, homeowners and timberland owners but makes it harder to fund education, public safety and health.

In fiscal year 2023, Alabama’s state and local governments collected over $4,900 per individual in taxes, including sales, property and income among other taxes. In comparison, the average total tax collected per individual for the southeastern states — where taxes are relatively low compared to the rest of the nation — was $5,198.

The report noted that Arkansas, “a state with less wealth and economic activity than Alabama,” collected $354 more per person in taxes.

“If Alabama collected taxes at Arkansas’ rate, state and local governments would have an additional $1.8 billion in state dollars to fund education, health care, highways, public safety, and the broad spectrum of state and local services governments provide,” the report said.

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In 2023, Mississippi began phasing out individual income taxes while Tennessee completely phased it out in the same year. Alabama’s income tax was established by constitutional amendment in 1933, an amendment that also included income tax thresholds and rates, with a top rate of 5% for married couples making $6,000 a year or more. While progressive for its time, the report notes that nearly a century of inflation means that they are “almost meaningless” today and subject low-income earners to the income tax.

According to the report, nearly half of the revenue collected by Alabama’s local and state governments comes from sales taxes, in comparison to the rest of the nation where sales taxes make up one third of state and local taxes.

“We have a lot of constitutional protections built in that preclude local governments from raising taxes in above certain limits on property in particular, but there’s pretty much no restriction on sales tax, and so we have some of the highest sales tax rates in the country,” Spencer said.

Sales taxes are more costly to poorer residents, resulting in burdens on their earning power and less overall revenue.

Alabama reduced the grocery tax from 3% to 2% last year. But this tax cut means less money for the Education Trust Fund, which is used to fund much of K-12 and higher education in the state.

“We’re going to have to keep an eye on our education funding to make sure it stays at a competitive level, so that we’re able to pay teachers and the other things that we’re continuing to do,” Spencer said.

Spencer also noted that the CHOOSE Act, a voucher-like program that can be used for education based expenses, including private school tuition, could pose a threat to the Education Trust Fund budget later on.

“We’re basically funding it with surplus money from prior years. But eventually, down the road, that could be, you know, a competent competition for education dollars,” he said.

This story is from alabamareflector.com.