Alabama Democratic Party

State has low taxes, atrocious tax system [MR, 07/09/08]

HOLD THE celebration for the news that Alabama has the lowest taxes in the country.

Our taxes in Alabama indeed are low, but our tax system may be the worst in the country. But, first, let's consider the seemingly good news.

Once again, U.S. Census Bureau reports show Alabama is last in the nation in state and local per-capita taxation. The state has claimed the low-tax title for more than a decade, according to officials with the Public Affairs Research Council of Alabama.

Few people enjoy paying taxes, and Alabama spares most taxpayers the pain of even moderate taxation.

It's a different story if you're poor, however. Alabama is a national leader in taxing the poor. The state relies heavily on sales taxes that take a disproportionate bite out of the wallets of low-income families. But if you're not poor, or if you own a business, your tax burden is relatively light.

A light tax burden can be an advantage in economic development. But it's probably more accurate to say high taxes can hurt a state's efforts to recruit and retain businesses. A case in point is Ohio, which has the nation's fifth-heaviest tax burden. Unemployment is above the national average in Ohio, and household income in the state is falling.

Alabama's economy is in better shape than Ohio's; tax rates almost certainly have something to do with that, but it's not clear how much. After all, government services -- most notably, education -- also play a role in economic development.

This state does not adequately fund state or local services, although it does a decent job of funding education -- if you take into account its low tax rates and low ranking in per-capita income.

Alabama's ridiculously antiquated constitution prevents local officials from doing much for their constituents. This is a factor in the state's standing in taxes, but it doesn't help cities and counties deal with public demands for improved services.

Adjusted for per-capita income, Alabama's state and local tax collections rank 46th in the nation. That seems reasonably fair until you consider the state imposes income taxes on families below the federal poverty level. Only one other state (Montana) taxes annual incomes below $13,000.

Regressive taxation hurts state and local services as well as the poor. Alabama's dependence on sales taxes creates manic-depressive budget cycles: State lawmakers spend heavily when sales tax revenues are flowing and then abruptly cut services and pull back when the economy hiccups and tax revenues level off.

Alabama currently is in a "down" budget cycle. Education -- especially higher education -- is suffering the consequences. If the economy continues to cool, Gov. Bob Riley may have to empty the state's reserve funds to maintain services at the reduced level established by the Legislature earlier this year.

Put most of the blame on the state's wacky tax system and the Legislature's unwillingness to change it. Yes, Alabama is a low-tax state, but as we noted above, that's no cause for celebration.