Ken Hare In Depth: Tax increases likely early focus of legislative session

Ken Hare In Depth: Tax increases likely early focus of legislative session

MONTGOMERY, AL (WSFA) - The early weeks of the Alabama Legislature are likely to be dominated by one issue -- whether Gov. Robert Bentley can sell his proposed tax increases to the Republican-dominated House and Senate.

As the session wears on, other issues will loom big as well, among them prison reform and charter schools. But the Legislature has one job it is required by law to do each year -- pass balanced budgets -- and that won't be an easy task this year.

Bentley maintains that the state faces a long-term shortfall in its budgets of $700 million, with a shortfall of about $250 million in the fiscal year that begins Oct. 1. To begin to address the shortfall, he has proposed a laundry list of changes to the state's tax structure. Some of those changes will close loopholes and others are plain, old-fashioned tax increases. If all of them become law, the governor's office estimates they would generate $541 million a year.

Before addressing some of Bentley's specific proposals, let me give a brief history lesson.

The Legislature has two budgets to pass each year -- the Education Trust Fund, which covers spending for state public schools and colleges, and the General Fund, which covers most non-education functions of government.

For at least a couple of decades, developing a General Fund budget has been especially problematic for lawmakers and governors. Most of the taxes that generate the revenue streams that flow into the General Fund are not "growth taxes" that generate increased revenue each year to keep up with inflationary costs.

So for years now, governors and legislators have balanced the General Fund budget through a combination of cuts in services, use of one-time money, and even borrowing. But that has become increasingly hard to do, especially in recent years in a soft post-recessionary economy in Alabama.

To his credit, Bentley has said it is time for the state's elected officials to stop cobbling together a General Fund budget each year and to finally do something that will address the long-term issues facing the General Fund and, to a lesser degree, the education budget.

Against that background, I would suggest that each of Bentley's tax proposals should be judged by three main criteria: First, will it help meet the current fiscal crisis?; second, will it help the growth issues in the General Fund over time?; and finally, is it fair?

Bentley's proposals include:

-- Increasing the sales tax on automobiles to match the state's general sales tax: Currently Alabama taxes the sale of automobiles at 2 percent and most other things at 4 percent. There is very little logic in taxing automobiles at a lower rate than other goods, especially when Alabama taxes such basic commodities as groceries at 4 percent. Increasing this tax to the same level as other goods would be fair, the revenue stream from the tax should grow with the economy, and the $200 million it would generate would go a long way toward meeting the expected shortfall in revenue.

-- Increasing the tax on tobacco products from 42.5 cents a pack to $1.25 a pack. Frankly, this should have been done long ago simply as a health measure.

Alabama has one of the lowest tax rates on tobacco products in the nation, ranking 47th among the states. If Bentley's proposal were to pass, Alabama would still tax cigarettes at far below the average among the states of $1.54 per pack.

Increasing the tax on cigarettes has a documented effect on lowering smoking rates, especially among youth. It also decreases the number of young people who begin to smoke.

While this tax proposal would generate about $205 million a year in additional revenue, it would not be a growth tax over time because it would probably cause fewer people to smoke. But the reduction in tobacco use should eventually save the state tens of millions in health costs, especially in the Medicaid program.

(In the interest of disclosure, readers should note that my wife works in the tobacco-cessation field. However, my support for smoking reduction programs long predates her employment in that field, going all the way back to watching my parents, my grandfather and other relatives and friends die from tobacco-related illnesses.)

-- Closing a corporate income tax loophole: The governor maintains that a loophole in the law allows about 58 percent of all corporations that do business in Alabama to avoid paying any corporate income taxes. This is a loophole that should be closed simply based on fairness. It would generate about $20 million a year in additional revenue, and the revenue from closing the loophole should grow each year.

In addition to these major proposals, Bentley suggests eliminating several special tax breaks for certain businesses, including banks, public utilities, and insurance companies.

Raising taxes always is a difficult proposition in Alabama, despite the fact that Alabamians pay some of the lowest state and local taxes in the nation. The last time it was tried in a major way came in 2003, when former Gov. Bob Riley proposed a $1.2 billion tax increase. The measure was soundly rejected by voters, even though it actually would have reduced taxes for many of the elderly and the working poor who voted against it.

If nothing else, Bentley's proposals should be applauded for beginning a discussion on dealing with the General Fund's chronic revenue issues and addressing in a small way issues of tax fairness.

As they consider Bentley's proposals, legislators should remember that unless they do something they likely will face increasing difficulty in balancing the General Fund budget in coming years. Unless the Legislature does something about prison overcrowding, it is possible that the federal courts will order a mass release of prisoners. In addition, Medicaid programs have been cut to the point that essential services already have been impacted.

It's going to be tempting for legislators to pander to voters by denouncing higher taxes. But before they do, they should remember that those same voters also might blame them down the road if state prisoners are released en masse or if their grandmother loses her Medicaid benefits.


Ken Hare is a veteran newspaper editor and editorial writer who now writes a regular column for Email him at