Alabama Tax Reform:
A Little Progressiveness and
Some Revenue Too
This article presents a couple of ideas for making the
Alabama tax system more progressive while raising
some revenue. The recent Institute on Taxation and
Economy Policy (ITEP) report titled “Who Pays: A
Distributional Analysis of the Tax Systems in All 50
States” is just the latest in a long line of reports and
news about the regressive nature of Alabama’s tax
structure. The state tax structure has even been
labeled immoral. The share of income that taxes
constitute is highest for the state’s poorest and drops
quickly with rising income so that those who can
afford to pay more actually pay much less.
According to the ITEP report the share of income
that goes to Alabama state and local taxes is 10.3 percent for non-elderly families earning less than
$13,000, 9.4 percent for those with income between
$21,000 and $36,000, and just 3.7 percent for those
with more than $229,000 in income. The quoted
shares of income are after the Federal Deduction
Offset. Families in the last group, the top one percent, have an average 2002 income of $682,000. So
our taxes are unfair since they hit low- and middleincome families much harder than the wealthy. The
sad part is that they are becoming increasingly unfair
with time and inaction.
In addition to problems with fairness, the Public
Affairs Research Council of Alabama (PARCA) has
documented that Alabama taxes are neither adequate
nor efficient. Efficiency deals with balance among
revenue sources, flexibility of revenue distribution
and use (the earmarking issue), and general management of tax revenues to avoid waste and promote
best use. It is important to rid the government of
waste but resources are needed for that effort. As
such, raising revenues would seem to be the best way
to address both adequacy and efficiency. With a new
administration and general calls for tax and constitutional reform, the time may perhaps be right to
address these problems.
We do not have to look far for solutions. Two reports of the early 1990s from the Alabama Commission on Tax and Fiscal Policy Reform (ACTFPR) and
the Tax Reform Task Force (TRTF) contain some
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gems. Two recommendations of the TRTF could
generate an additional $518 million in property
taxes based on 2002 receipts; raising the state property tax rate from 6.5 mills to 14 mills ($222 million)
and tacking on an extra 10 mills for schools ($296
million). This would free us somewhat to focus on
the fairness issue and design a less regressive or even
a progressive tax system.
Alabama taxes are regressive because of the high
dependence on sales and excise taxes, especially
when applied to food items and medicines. To make
our tax system fairer a progressive income tax rate
structure would be needed to counter sales and
excise taxes, which are based on price or unit of
goods purchased. It has been publicized that a twoparent family of four begins to pay Alabama income
taxes when earnings exceed $4,600, although the figure is actually $7,600 when one considers both
exemptions and deductions. Additionally, our “graduated” income tax rate structure has essentially
become a flat tax because the rate does not adjust
over time with some index such as inflation.
Solution: Alabama needs a progressive income tax.
Taxes are about provision of public services and
redistribution. Hence the rich who would be paying
more under a progressive tax system can be proud of
their altruism and civic-mindedness. Table 1 shows a
more progressive Alabama income tax schedule that
proposes a doubling of the exemption to $3,000 for
single taxpayers and married couples who file separately and $6,000 for married couples and unmarried
heads of family as well as a new graduated schedule.
Estimates of its effects are shown in Table 2 and are
based on Alabama Department of Revenue individual income tax data for 2000. Clearly, filers with less
than $38,000 adjusted gross income (AGI) will be
paying less income tax than under the current system. The break-even AGI is in the $40,000 to
$50,000 range depending on filing status. Actual tax
payments under the proposed progressive system are
also shown. AGI levels below which filers will not
owe any income tax are $5,000 for single and married filing separately, $8,300 for unmarried heads of
family, and $10,000 for married couples filing jointly.
A two-parent family of four will not pay Alabama
income tax on the first $10,600 of income. In addition, an extra $38 million in income taxes would be
generated with the proposed schedule.
Yes, we can solve the problems with our tax system.
Hopefully, any reform will have dynamic features
built in so that the system does
not become regressive over time.
The two reports mentioned earlier have other good recommendations that can be exploited. A
couple of them involve designing
a more progressive property tax
component of taxes and dropping sales taxes on food items.
Designing and adopting a progressive Alabama tax system is
possible and the time for it is
now.
Samuel Addy
Table 1. Existing and Proposed Alabama Individual Income Tax Rate Schedules
Current
Exemption
1,500
- Joint Filers and Heads of Family 3,000
Standard Deduction
2,000
Dependent Exemption
300
Threshold ($)
Above
0
500
3,000
Minimum Tax
0
10
110
Proposed
Exemption
3,000
- Joint Filers and Heads of Family 6,000
Standard Deduction
2,000
Dependent Exemption
300
Rate
2.0%
4.0%
5.0%
Threshold
0
3000
6000
12,000
18,000
Minimum Tax
0
90
210
510
870
Rate
3.0%
4.0%
5.0%
6.0%
6.5%
Source: Alabama Department of Revenue and Center for Business and Economic Research,
The University of Alabama.
Table 2. Estimated Effects of a Progressive Alabama Individual Income Tax
Adjusted
Gross Income
Change in Income Tax per Filing by Status
Single
Married
Married
Head of
Joint
Separate
Family
Less than 1,500
1,501-3,000
3,001-6,000
6,001-8,000
8,001-10,000
10,001-12,000
12,001-14,000
14,001-16,000
16,001-18,000
18,001-20,000
20,001-22,000
22,001-24,000
24,001-26,000
26,001-28,000
28,001-30,000
30,001-32,000
32,001-34,000
34,001-36,000
36,001-38,000
38,001-40,000
40,001-45,000
45,001-50,000
50,001-55,000
55,001-60,000
60,001-65,000
65,001-70,000
70,001-75,000
75,001-80,000
80,001-85,000
85,001-90,000
90,001-95,000
95,001-100,000
100,001-200,000
200,001-300,000
300,001-400,000
400,001-500,000
500,001-600,000
600,001-700,000
700,001-800,000
800,001-900,000
900,001-999,999
Over 999,999
(17)
(7)
(52)
(72)
(95)
(109)
(125)
(125)
(125)
(125)
(125)
(113)
(100)
(87)
(73)
(59)
(44)
(23)
(8)
8
9
63
107
151
200
240
335
309
359
396
441
476
835
1,566
2,332
3,135
3,894
4,267
5,412
5,965
7,403
15,734
na
(2)
(7)
(31)
(62)
(102)
(127)
(149)
(171)
(184)
(198)
(200)
(200)
(200)
(200)
(193)
(177)
(163)
(150)
(135)
(55)
(54)
(2)
48
97
142
188
231
273
314
364
398
658
1,518
2,299
3,032
3,871
4,456
5,427
5,944
6,776
16,076
(41)
(5)
(50)
(67)
(91)
(107)
(122)
(125)
(125)
(125)
(125)
(115)
(106)
(91)
(78)
(74)
(54)
(40)
(23)
(13)
32
52
85
132
177
211
260
296
316
352
410
424
660
1,489
2,068
2,768
3,583
4,176
6,342
6,404
6,726
16,026
(22)
(1)
(12)
(69)
(119)
(152)
(178)
(195)
(200)
(200)
(200)
(200)
(198)
(186)
(175)
(164)
(153)
(140)
(126)
(104)
(57)
(29)
11
63
104
146
192
230
274
311
343
416
656
1,525
2,291
3,140
3,545
3,580
4,787
4,998
10,908
Single
5
55
92
147
208
284
361
435
504
582
662
737
820
897
962
1,051
1,117
1,184
1,408
1,426
1,616
1,806
2,017
2,192
2,605
2,489
2,705
2,868
3,063
3,214
4,769
7,938
11,255
14,738
18,028
19,642
24,602
27,000
33,229
69,332
Progressive Tax per Filing by Status
Married
Married
Head of
Joint
Separate
Family
25
58
95
147
202
268
344
417
480
553
647
731
812
893
1,236
1,245
1,468
1,685
1,896
2,093
2,293
2,479
2,661
2,837
3,053
3,199
4,327
8,054
11,437
14,617
18,251
20,786
24,995
27,235
30,841
71,138
1
48
84
138
197
271
343
427
480
569
625
713
794
818
917
980
1,053
1,095
1,290
1,375
1,521
1,722
1,920
2,067
2,279
2,435
2,520
2,679
2,929
2,990
4,014
7,606
10,112
13,145
16,679
19,249
28,636
28,901
30,298
70,598
14
63
123
192
262
336
402
465
524
592
659
725
790
871
931
1,026
1,231
1,350
1,525
1,748
1,926
2,109
2,311
2,472
2,664
2,826
2,964
3,278
4,318
8,086
11,406
15,083
16,838
16,990
22,218
23,136
48,743
Source: Statistics of Income: 2000 Tax Year, Alabama Department of Revenue and Center for Business and Economic Research,
The University of Alabama.
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