Revenue Raising in Alabama: Another Opportunity

Alabama Gov. Robert Bentley has publicly said his state has a revenue problem, not a spending problem.

Perhaps this isn’t the most profound statement, but it is remarkable coming from a Republican governor who 1.) governs a state that would require a constitutional amendment to increase its low personal income tax rate, and 2.) has signed Grover Norquist’s infamous no-tax pledge.

The governor’s resolve will once again be tested this week as Alabama lawmakers reconvene for a second special session to address the state’s projected $200 million budget gap before the start of the state’s fiscal year on Oct.1. Gov. Bentley has twice proposed revenue raising packages to help set the state on a path toward fiscal sustainability and ensure vital services that improve the quality of life for all Alabamians are protected. Yet conservative lawmakers have thus far refused to compromise or put forward a plan free of damaging spending cuts.

This week’s revenue raising discussions are being greeted with anticipation and hope by many, including the 200 groups who signed on to the Stand Tall Coalition’s letter. The letter cautions lawmakers that, “Further cuts will set our state’s health system and economy on a dangerous course.” The stakes are as high as they were during the state’s regular session, if the state fails to raise new revenue,– rural hospitals could close, funding for quality childcare could be slashed,  and state troopers could close their jobs.

That, of course, is the crux of the problem with refusal to increase taxes, not just in Alabama but in other states. In theory, no-tax pledges often disconnect taxes from vital public services that our taxes fund. In practice, refusal to raise revenue often comes at a steep cost to the general public. So it’s refreshing that Gov. Bentley is pushing lawmakers to send him a bill that will raise enough revenue to plug the state’s budget gap without having to slash funding for vital programs and services.  

The governor vetoed a cut-filled budget in June and called lawmakers back for a special session in early August to seek a revenue solution to the state’s revenue problem.  However, the first special session fell apart when the House and Senate couldn’t agree on a way forward, thus lawmakers are back in Montgomery this week for a second special session.

The governor is once again proposing $260 million in revenue-raising measures that are similar to those he put forward during the first special session – eliminating the deduction for the Social Security portion of payroll taxes (taxpayers who itemize can currently deduct the full value of their payroll taxes an uncommon state tax policy practice), a 25-cent cigarette tax increase, and a few small business tax changes. The changes to the state deduction for payroll taxes is a long sought reform that will broaden the state’s income tax base and shore up revenues for the long term.  An ITEP analysis found that 65 percent of the revenue raised from the payroll deduction reform will be paid by the top 20 percent of taxpayers.

On Wednesday, the House Ways and Means General Fund Committee approved bills that raised $130 million in taxes on car rentals, car titles, cigarettes, and businesses. Should this package become law, the state’s car rental tax would increase from 1.5 to 2 percent, the car title fee would increase to $28 up from $15, and the tax on cigarettes would go up to 25 cents.   The full House is expected to vote on the bills Thursday.  Gov. Bentley isn’t satisfied with the House committee’s tax package, but he calls the bill a “step in the right direction” and says that more must be done. He cautions, “If the gap is not closed then they (lawmakers) will be closing down some facilities in the state.”

It remains to be seen if compromise will win the day in Montgomery and if enough revenues will be raised, but the fact that House members supported revenue raising measures for the first time this week is a positive sign.