The common good
We’re all in this together. All of us – people of every race, gender, age, income and background – benefit from a network of services from our local, state and national governments. From garbage collection to fire protection, from roads to schools, from public health to public safety, our tax dollars support the daily upkeep of our common good.
The 50 state governments are vital links in this network. It’s a solemn trust: Each state is responsible for ensuring the safety, general well-being and education of its people. And each state government carries out this responsibility in its own way.
As Alabamians, many of us studied our state government in fourth grade and learned a little more about it in other classes. But until we’re out making a living, paying taxes and voting, these lessons may seem disconnected from our everyday lives. The Alabama Tax and Budget Handbook is designed to make that connection. The handbook breaks down state finances into basic functions that affect every taxpayer: What do our tax dollars pay for? How does state spending work? Where does the state get its money?
The handbook also looks at how those functions measure up – in relation to residents’ needs and abilities, in fairness and equity for all residents, and in comparison to the performance of other states. And the handbook offers ideas for making Alabama’s finances fairer, simpler, more adequate for meeting our needs and more easily communicated to the public.
This is the third edition of the handbook. Alabama Arise developed the first handbook in 2005 and updated it in 2015 to reflect changes in the 10 years since the original edition. This new edition incorporates recent changes to state law and expands our discussion of Alabama’s budgeting process. This edition also reflects Alabama Arise’s commitment to racial equity by delving into the racist history of our tax system and exploring the disparate impact of budget and tax decisions on Alabama’s residents of color.
What are the origins of Alabama’s tax structure?
Alabama’s deeply regressive and upside-down tax system is the legacy of the state’s history of slavery and segregation. It’s a history and a tax system that Alabama shares with many of our neighboring Southern states. And it’s a history and a tax system “linked to [S]outhern states’ continuing underinvestment in public services with a willful austerity that inhibits opportunities for the region’s residents to thrive,” according to the Institute on Taxation and Economic Policy (ITEP).
Immediately following the Civil War and the end of legalized slavery, Alabamians elected many Black citizens to the Legislature. These new lawmakers adopted a new state constitution that, according to historian Wayne Flynt, was “devoted to raising additional revenue, providing universal education [and] expanding state services[.]” During this period, these Black legislators and many white allies made significant investments in public services across Alabama, particularly education. These attempts to expand opportunities for everyday citizens led to tremendous racial and political tensions.
After the Reconstruction period ended, a newly empowered white-majority state government wrote a new constitution that segregated schools, slashed taxes, reduced public services and limited the political power of Black people. The 1901 constitution cemented these provisions, and more, in place. This constitution was designed explicitly to disenfranchise Black people, reinstitute the racist system of white supremacy and limit the state’s ability to tax a major source of white wealth: land.
Alabama’s 1901 constitutional convention intentionally excluded Black representatives. Instead, the Planters and Big Mules dominated the convention. The Planters were large landowners, mostly from the Black Belt. The Big Mules were industry leaders in the banking, railroad and industrial sectors. These two groups joined forces at the convention, where the main question was whether the new document would strip voting rights only from Black people or if it also would restrict the influence of poor white people.
Delegates chose the latter option and wrote a constitution that sought to perpetuate the system of white supremacy that had dominated Alabama prior to Reconstruction. The delegates did not try to hide their ultimate goal in drafting the 1901 constitution. As the convention president said during his opening address: “And what is it that we want to do? Why, it is, within the limits imposed by the [f]ederal Constitution, to establish white supremacy in this [s]tate.”
Many newspapers warned that the 1901 constitution, if ratified, would result in inadequate funding of Alabama’s public education system. Some delegates, however, intentionally sought to deny the right to a public education, believing that providing Black people with a quality education would threaten the system of white supremacy. Many delegates also believed Black people would gain the most from services like public schools. Therefore, the 1901 constitution’s drafters ensured that generations of policymakers would lack both the money and the power to invest adequately in services that might disproportionately benefit Black people. These racist impulses, combined with protections for the property interests of the Planters and Big Mules, resulted in a severe cap on property taxes. That cap limited available funding to support public schools and other services.
During the Civil Rights Movement, activists and lawyers were able to get many of the overtly racist sections of the 1901 constitution stricken. And in 2022, Alabama voters approved a recompilation of the constitution that removed many of these stricken sections entirely. But mounting successful challenges to the tax policies embedded in the document has proved much harder. For example, the 1901 constitution capped state property taxes at 6.5 mills, a limitation that is still in effect today. The constitution also limited the home rule of counties and cities, including their ability to increase their own local property taxes.
There is no question that the cumulative effect of these property tax limitations has been to restrict funding for public education, especially in rural counties in Alabama’s Black Belt, disproportionately harming Black children. To this day, the state constitution concentrates taxation power in the Legislature, then and now dominated by white representatives.
In 1939, the Legislature passed a law creating a 2% state sales tax, which has increased to 4% over time. The state constitution requires counties to get the Legislature’s approval to increase many categories of sales taxes, just like with property taxes. Cities, meanwhile, can increase sales taxes without having to ask for legislative permission. But the constitution makes it much harder for cities and counties to increase property taxes, requiring the Legislature’s approval and then approval in a voter referendum.
Because it’s easier for localities to adjust sales taxes than property taxes, cities and counties often rely heavily on sales taxes to fund local services like roads and fire protection. And because sales taxes are highly regressive, their impact lands disproportionately on Alabamians with the lowest incomes.
The tax that best offsets regressive taxes like sales taxes is the state income tax. In 1935, Alabama approved a graduated income tax that was quite progressive. That year, when the state began taxing incomes of $3,600 or more for a family of four, teachers earned around $500, and only about 7,000 people in Alabama earned enough to be subject to the new tax. But since then, income tax brackets haven’t kept up with inflation. What originally was enacted as a progressive tax has now become essentially a flat tax that no longer offsets the regressive effects of state and local sales taxes.
Alabama’s tax system continues to worsen racial and ethnic income disparities, ITEP found in a 2020 unpublished analysis. Black and Hispanic families in our state face higher effective tax rates than white families but have lower average incomes. ITEP found that Black families paid 7.8% of their incomes in state and local taxes, compared to a statewide average of 7.3%. The organization’s analysis concluded that Alabama was among the worst performing states in racial inequities embedded in the tax system.
Alabama’s current tax structure was created by the same 1901 constitution that sought to entrench our state’s long history of segregation and racial discrimination. To make our tax structure more adequate and fairer, we will have to confront and address the impulses that drove these decisions made more than a century ago.