How could we make our tax code more fair?

Alabama can move forward by changing its outdated, imbalanced approach to raising revenue. Our state’s current approach is not helping workers get ahead, and it is not adequately funding education, health care and other vital services that help make widely shared prosperity possible. Alabama should consider numerous reforms to make its upside-down tax system more just, equitable and resilient.

Income tax: Because much of Alabama’s income tax structure is spelled out in the constitution, changing it would require changing the constitution. If Alabama’s income tax more closely followed the system of exemptions and deductions used at the federal level and in many other states, working families would have more money available to spend. That would boost the economy and improve their quality of life. The following proposals would help modernize our income tax and make it fairer:

Make income taxes less regressive and more progressive.
Reform out-of-date deductions.
Eliminate the federal income tax (FIT) deduction.
Review Social Security contribution deductions.
Establish a state Earned Income Tax Credit (EITC).
Gradually increase standard deductions.

Sales taxes: Alabama can modernize its sales tax system to make the tax less regressive and more reflective of current spending patterns. Policy changes that would advance these goals include:

Modernize the sales tax on goods and services, including eliminating the grocery tax.
Expand the sales tax to include more services and digital goods.
Adopt a progressive approach to taxing services.
Target exemptions for essential goods and services.
Regularly review and adjust sales tax rates.
Conduct a cross-state comparison.

Property taxes: Numerous property tax reforms would help restore balance to Alabama’s upside-down tax system. Large landholders would pay more, while small-scale farmers would pay less. And Alabamians’ overall property taxes still would remain below the national average. These reforms include:

Evaluate and update the state property tax rate.
Increase overall property tax rates.
Protect homeowners with low incomes by increasing the homestead exemption.
Protect small-scale farmers by creating a “farmstead exemption.”
Adjust current use formulas to make them fairer.

Business taxes: A number of changes to Alabama’s business taxes could make them fairer and increase the amount of money for vital services, which businesses benefit from as much as individuals and families. These include:

Remove the deduction for federal income tax payments and reduce the corporate income tax rate to 6%.
Raise the cap on the business privilege tax so the wealthiest corporations will compete more fairly with smaller ones.
Adopt combined tax reporting for businesses and their subsidiaries.
Restore Alabama’s three-factor apportionment formula for calculating corporate income tax liability.
Decouple Alabama’s business taxes from the federal tax code so that tax breaks or increases given by Congress do not automatically apply to state business taxes.
Limit tax incentives for luring companies to Alabama.

New rules: What to watch for in new tax proposals

We can use four criteria to assess plans to improve Alabama’s taxes:

1. Fairness: Do they lower taxes for those who pay too much and increase taxes for those who pay too little?

Will wealthy people and highly profitable companies pay their fair share? Alabamians with low incomes pay more than twice the share of income that the top 1% pay in state and local taxes.
Will new plans tax low-paid workers deeper into poverty? Hurdles in Alabama’s constitution make it hard to raise new revenue through income or property taxes. But it’s easy to increase sales taxes, driving “the least of these” deeper into poverty and forcing them to shoulder an even greater share of the cost of the public services that benefit us all.

2. Adequacy: Do new plans meet the needs of a growing population?

Do the plans help end the state’s structural deficit? Simply put, will they pay the bills? Stagnant income sources can’t keep pace with rising costs. One way to keep up with the changing times would be to extend our sales and use taxes to cover the services that account for an increasing share of consumer spending. We also could revise how we tax corporations so that the largest and most profitable pay their fair share of state taxes. And we can adjust our individual income taxes so that the wealthiest households pay their fair share while allowing more robust tax deductions for working families.
Do the plans allow flexibility to address changing needs? As technology evolves and the population grows, Alabama must be able to keep up. Can our public schools educate our children properly when policymakers continue to redirect a growing share of their funding to private schools and homeschooling? Can one of the nation’s most limited Medicaid programs adequately serve aging and working populations? Can our overcrowded, brutal and inadequate prisons provide real rehabilitation and second chances for returning citizens? If we want a better tomorrow, we need to invest in it today.
Does Alabama have adequate reserves? Or have we set too much aside in reserve that could be used to fund critical services for our residents? Do our multiple reserve accounts meet the needs of the people, or are they confusing and duplicative? We should take a careful look at our reserve funds to see if they serve our residents’ best interests or if they could be streamlined and revised.

3. Simplicity: Can people file a basic tax return?

Is it easy to understand how taxes work? As lobbyists and special interests push new tax measures, our income tax form gets more complicated. Key principles can keep the system simpler.
Does our tax system have confusing loopholes? A hodgepodge of tax breaks for some but not others makes our system inefficient. Worse yet, legislators sometimes create preferences for certain industries without revealing who would benefit.

4. Transparency: Can we see that everyone pays a fair share?

Does the budget process let the public follow the money from tax collection through spending? Policymakers should set rules that ensure everyone pays a fair share in taxes. Do we know how much money is available for the state to spend on core services? And how can we ensure state agencies have what they need to provide vital services to families who are struggling to make ends meet?
Is the state required to list tax breaks in a format that is clear and understandable? Alabama’s budgets reveal our values and priorities. But many tax breaks pushed through by powerful lobbyists can be virtually invisible. While Alabama provides a report on tax breaks, it’s difficult to read and understand. Most residents aren’t going to read audit reports to find tax breaks offered by state and local governments. Alabama’s tax expenditure report is a good first step, but it needs improvements to become truly accessible to the public.

Bottom line: Does our government reflect our values?

We need strong public services and inclusive public policies to meet the needs of our people. We create governments to promote the common good, to do together what we can’t accomplish alone – educating and protecting and planning and building a better future for everyone. If we hope to move forward, we have to change our broken, upside-down approach to taxes and budgets.

By getting involved, Alabamians can require their policymakers to be responsive to the needs in our communities. Our residents deserve a government that gives everyone a voice, an economy that offers everyone a chance to get ahead, and an Alabama that works for all of us.