Alabama’s income tax hits poor harder than most, but it wasn’t always so
Alabama’s relatively flat income tax hits low-income residents harder than in most states, but it wasn’t always so, according to a budget primer produced by the anti-poverty Arise Citizens’ Policy Project.
“The Alabama Tax Budget Handbook,” an update from the first publication in 2005, notes that the state income tax started out highly progressive. When the state Legislature first levied the income tax in 1935 – using authorization from a 1933 constitutional amendment – the tax did not kick in until after the first $3,600 of income for a family of four. That was high enough to keep most people from paying taxes.
Arise notes that the average teacher salary, for instance, was about $500.
Only about 7,000 people, less than a quarter of 1 percent of the population, earned enough to be taxed, according to the report.
“Incomes used to be so much lower then,” said Carol Gundlach, a budget analyst with Arise.
Susan Pace Hamill, a University of Alabama School of Law professor who has studied the state’s tax system, said then-Gov. Benjamin Meek Miller barnstormed the state to build support for his tax initiative. She said he would ask folks for a show of hands who paid the federal income tax, which at the time was a levy only on the extreme wealthy. Almost no one would raise his hand.
“He would say, ‘If you don’t pay Uncle Sam, you don’t pay Alabama,'” Hamill said.
Miller eventually got his tax, but it wasn’t easy. His first two efforts failed, in 1931 and 1932. According to historian Hardy Jackson’s 2004 book, “Inside Alabama: A Personal History of My State,” Alabama was on the verge of collapse.
“By the time the second income-tax vote was counted, only 16 of Alabama’s 116 school districts were able to pay their teachers a full salary,” Jackson wrote. “As 1932 drew to a close officials in Montgomery were warning that as many as half the schools in the state would not open in January.”
Hamill sees parallels between Miller and the current governor, Robert Bentley. Both men were conservatives who had run on no-new-taxes pledges. But both presided over crushing fiscal crises.
“He (Miller) was not a progressive governor at all. He was kind of like what Gov. Bentley’s going through,” she said. “Gov. Bentley is experiencing in a sort of metaphorical way what Gov. Miller experienced in the ’30s.”
Over the ensuing decades, though, inflation eroded the buying power of $3,600. The state failed to adjust the threshold.
“The problem is, we never updated it,” said Jim Carnes, the policy director for Arise. “It’s really kind of stunning how progressive that was.”
Prior to 2006, the taxing threshold had been raised to just $4,600 for a family of four. In 2006, the state raised it to $12,600. But that still is the lowest in the nation among states that have an income tax, barely more than half of the federal poverty line — $24,008 for a family of four in 2014.
By contrast, Mississippi exempts the first $19,600 of income for a family of four.
The top 5 percent income tax applies to two out of every three families in Alabama. Arise uses a hypothetical example of a family of four earning at the poverty line. In Alabama, that family would pay $618 in state income taxes. In all 15 other states, it would pay nothing.
The standard and dependent deductions are low, too. For individuals, it is $2,500, less than half the federal deduction. The maximum for couples is $7,500, barely more than half the federal level.
Hamill said making exemptions and deductions more generous would make the tax code more progressive. However, she pointed out, it would raise less money absent any other changes.
“If you don’t replace the revenue from somewhere else, you lose the revenue,” she said.
The Arise budget book, which details how the state spends some $29 billion in state and federal revenue, repeats a number of recommendations that the group has pushed for years. A coy of the book can be ordered for free at at arisecitizens.org.
Here are some of the recommendations:
- Increase the personal exemption from $1,500 to $3,900.
- Remove or rebate the state sales tax on groceries and other necessities.
- Increase overall property tax rates. Raise the minimum local millage rate required for schools from 10 mills to 20 mills.