Before I was elected to the Alabama Senate, I had always thought about creating a simpler tax structure for Alabamians. My analysis began with a potential policy change toward a flat tax. Initially, I had the notion it had the potential to solve Alabama’s budget troubles. By moving to a lower flat tax gradually, excess revenues could be generated to help the state. But I could not bring myself to approach it that way. It would just be another tax increase, hidden within a tax policy change. Because of this, I decided to focus instead upon getting our tax rate as low as possible, as soon as possible. The goal was to be revenue neutral with the change, generating no less – or no more – state income tax revenue than we have today.
I believe this policy change will have a tremendous upside potential for our economy. By aggressively lowering our rates, we can actually stimulate growth and spending in Alabama. Fourteen states cut their taxes in 2014. States are competing, more than ever, for people and industry. Although we have benefited most recently with the corporate relocation wins of Remington and Polaris to Alabama – which shows we have an advantage at present – other states are not standing still.
When you look at national rankings of states and their income tax rates, Alabama is ranked 12th lowest for personal income tax rates (That’s good). And Alabama is ranked 6th lowest in corporate income taxes (Also very good). But there is an area where we can improve and it’s not only in the rate, but also in the complexity. Compared to other states we are 28th in the nation in terms of the Business Tax Climate Index due to the complexity of our tax code, including the quantity of special tax carve outs.
Alabama operates each year on about $3.6 billion of income tax revenue. If we were to take our income tax code as it is today and eliminate all credits, exemptions, and deductions, the total income tax revenue would soar to $6.4 billion (I’m not advocating that, by the way). With over
60+ years of giving a seemingly small number of deductions, credits, and exemptions to various groups, we have amassed a 100+ collection of these in our income tax code. The total “cost” of which is $2.8 billion. In other words, we could raise $6.4 billion in revenue annually if we had no deductions, credits, or exemptions, but we allow 44% in tax carve-outs to special groups. Why don’t we instead eliminate Montgomery’s tax carve-outs, drastically reduce the income tax rate, and allow Alabamians the right to decide what to do with their own money. At the same time we
will eliminate the associated paperwork as well as difficult and cumbersome calculations.
Another reason why I want to reform the way we do taxes is that even with the present relatively low 5% statutory personal income tax rate, taxpayers are often required to complete a 15+ page income tax return in Alabama. It should be easier to calculate and pay the Alabama income tax, than it is today.
This option requires a different perspective on Alabama’s income tax policy. Our income tax policy is a strategic asset for the state, and we should manage it in a way that is going to benefit all of Alabama. We can do so by not by picking winners and losers, but by simplifying and lowering our taxes, removing these special tax carve-outs, and adopting the Simplified Flat Tax.
Doing so will bring a multitude of benefits to Alabama:
– Complete transparency for the taxpayer and the state.
– Most Alabamians would be able to complete their Alabama income tax return on a post card.
– Fewer taxpayers will try to escape Alabama to pay their taxes elsewhere.
– Fewer audits…or at least fewer items to argue about.
– More stable revenues for the Education Trust Fund.
– Little to no tax prep expense (present avg. cost for residents to prepare state taxes: $300)
Another benefit to the Simplified Flat Tax is that it’s so simple you no longer need to ask an expert how much you will owe in state income taxes. Find out for yourself how easy it is. After completing your federal 1040 return, go to the first page and locate the bottom right hand number (on line 37). It’s called your “Adjusted Gross Income”. Simply take that number and multiply it by .0275 (2.75%). The product of which will be your taxes due to (or refund from) Alabama. You will then either fill out a post card and mail it to the state, or just go to the state website and pay that way. When you complete these easy steps, your Alabama income tax filing will be finished. Yes – it’s really that simple. And if the taxpayer has a low-income level that does not require them to file a federal tax return, they won’t file a state tax return either.
To implement the Simplified Flat Tax for Alabama, it must first pass the legislature and the Governor. After that it will go on a statewide ballot in 2016 for you to decide. The legislature cannot force this simplified, lower tax-rate plan upon you. You will have the final decision on the issue at the ballot.
As you consider whether you will vote for the Simplified Flat Tax Plan, consider taking my challenge. Simply pull last year’s 1040 federal tax return out of storage, and complete the calculation above. Compare this amount with last year’s amount due, and see if you will pay more or less under this plan. I did it and I’ll pay a few dollars more, but I think the simplicity and fairness make the change worth it. But you decide for yourself.
As you evaluate your result, be sure to remember you will no longer need an accountant, or a special computer program to complete your state income taxes. Also remember the time you saved and will save. All together, the benefits are substantial and will help all Alabamians in the years to come as we become more competitive for our home-grown businesses as well as those people and companies looking to relocate to our great State.
Senator Bill Hightower represents Alabama’s 35th Senate District.
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