Governor's Plan: Tax Reform

This outline of the Governor's plan was provided by the Office of the Governor to reporters, educators, and legislators.

Tax Reform: Overview

  • Personal Income Tax
  • Ad Valorem Tax
  • Corporate Income Tax
  • Insurance Premiums Tax
  • Mortgage and Deed Record Tax
  • Intangibles Tax
  • Sales and Excise Taxes
  • Utility Taxes

Tax Reform: Personal Income Tax

  • Fairness

— Raise the filing threshold for a family of 4 from $4,600 to $20,000

— $17,000 level next year, phased in to reach $20,000 in 3 years

  • Deductions

— Eliminate federal income tax deduction

— Allow deductions for mortgage interest, charitable contributions, and medical expenses

• Rate Structure

— 5% rate on all income below $75,000

—  6% rate above $75,000 for individuals, $150,000 for families

• Most taxpayers will receive an income tax cut under this plan

Tax Reform: Personal Income Tax

Personal Income Tax Examples:

1. A single mother with 3 children and $35,000 of income will receive a tax cut of up to $600

2. A married couple with 2 children and $70,000 of income can receive a tax cut of up to $150

3. A married couple with 2 children and $150,000 of income could pay an additional $940 in state income taxes

* Calculations based on election of standard deduction

Tax Reform: Property Tax

Proposed Changes

  • Assess all property at 100% of market value or current use value for state portion of tax
  • Reduce tax rate on state portion from 6.5 mills (.65%) to 3.5 mills (.35%)
  • Increase business property from 20% to 22% local assessment ratio
  • Create one business class of assessment by capping Class 1 property at current levels and equalizing with Class 2 property over time
Tax Reform: Property Tax
  • Current Use

— Current Use is designed to protect landowners by valuing the land based on how it is currently being used as opposed to its highest possible market value

— Assessed values for homes have kept pace with changes in the housing market

— The farmland values have not been updated since 1982, and the timberland values have been updated just once since 1982

— Update current use value schedule of farms and timberland to more accurately reflect true agricultural value

Tax Reform: Property Tax Protections
  • Increase homestead exemption from $4,000 to $50,000 of assessed value
  • Establish farmstead exemption to exempt the first 200 acres of farmland or timberland from state property taxes for owners who live on the land and elect current use
  • Changes will be phased in over 4 years
  • Property taxes in Alabama will still be below the Southeastern average and lower than every state around us
  • Alabamians over the age of 65 will be completely exempt from state property taxes on their homes
Tax Reform: Property Tax

Property Tax Examples, at Full Implementation (2007):

1. The owner of a $100,000 home would only pay an additional $11 a month (average home = $85,000)

2. The owner of a 200 acre farm would only pay an additional $8 a month (average farm = 190 acres)

3. The owner of 200 acres in timberland would only pay an additional $5 a month (average tract of timberland = 80 acres)

*Current state and local property tax rates for average timber and farm land is approximately $1.25 per acre

Tax Reform: Corporate Income Tax
  • Corporate Income Tax

— Raise effective rate from 4.2% to 6%

— Effective tax rate will be at the Southeastern average

  • Banks

— Banks will no longer be able to claim a credit for sales taxes paid

— Banks will be subject to the same rules as other corporations under the Business Privilege Tax

Tax Reform: Sales Taxes

• Sales Tax

— Increase sales tax rate on cars from 2% to 2.5%

— Increase lease tax rate on cars from 1.5% to 3%

— Include repair and installation services in the sales tax base

— Increase the state cigarette tax from 16.5 cents a pack to 31 cents a pack

Tax Reform: Insurance Premiums
  • Reduce the Business Privilege Tax Credit
  • Eliminate the Examination Expense Credit
  • Reduce the home office and real estate investment credits.
Tax Reform: Other
  • Mortgage and Deed Record Tax

— Increase mortgage fees from 1 mill to 2 mills

— Increase deed recording fees from 1.5 mills to 3 mills

  • Intangibles Tax

— Establish 1 mill tax on stocks and bonds

— Exempt retirement and college savings plans

— Exempt the first $200,000 of holdings for joint returns

— Cap intangible tax at $5,000 per year (A taxpayer would have to have more than $5 million in holdings to reach this cap)

Tax Reform: Conclusion
  • Governor Riley’s plan achieves fairness while remaining below the regional average in total tax burden
  • This package allows Alabama to fully fund the programs necessary to provide our children with a world-class education and still have the lowest property taxes of any surrounding state
Failure Is Not An Option

If we take no action:

— Medicaid budget slashed, jeopardizing 450,000 Alabamians (10% of the state's population)

— Corrections Dept — already severely underfunded; would be forced to release thousands of prisoners and lay off hundreds of employees

— As many as 25 of our poorest school systems could go bankrupt, affecting 100,000 students

— Drug coverage for 11,000 mentally ill Alabama citizens will almost certainly lost

• MOST IMPORTANTLY, we lose the opportunity to lay the foundation for greatness