Officials with the Department of Revenue told the Joint Committee on Budget Reform Wednesday that the state’s sales tax and many other traditional sources of revenue – including taxes on phones – were in decline because the state wasn’t keeping up with technology shifts.
Joe Garrett, deputy commissioner of the Department of Revenue, said legislators will have to think about restructuring the state’s tax structure to better reflect the online and digital economy.
“We used to tax about two-thirds of the economy in the sales tax,” Garrett said. “Today we tax one-third of our economy.”
The committee, established by resolution during the special session, is charged with studying the growing gap between General Fund revenues and expenses and propose ideas.
The budget, which provides money for most noneducation programs in the state, gets its funds from three dozen sources, most of which post flat growth year to year. Expenses in many state programs, including Medicaid and Corrections, continue to rise, but legislators have been unwilling or unable to approve new revenues for the fund or transfer existing ones.
Members of the committee said last month they intend to meet through 2017 to look at the issues dogging the budget. The committee will present a preliminary report to legislators in February.
The committee will consider many options, including biennial budgeting; elimination of the large number of earmarks for state revenues and reviews of tax credits extended by the state.
Clinton Carter, the State Finance Director, who also made presentations to the committee Wednesday, said early requests for the 2018 budgets appear to be “the same story (and) a different year,” with the Education Trust Fund budget – funded mainly by income and sales taxes – doing well and the General Fund likely to face a shortfall.
“We’re definitely getting to the point where most of the low-hanging fruit is gone,” he said.
Revenue officials said that was due in part to the structure of the sales tax, a large part of state revenues and, unlike income or property taxes, a revenue source one that legislators can change with a bill. Where the state reaped two dollars of sales tax in the 1960s for every dollar of income tax, today Alabama collects just 66 cents of sales tax for every dollar of income tax.
Other states are dealing with the same issue, Garrett said, but Alabama’s restrictive tax system makes it difficult for the state to address.
“We are now leaning very heavily on the income tax,” he said. “There are low property taxes, and our sales tax base is eroding.”
Other taxes are in decline as well. While taxes on landline phones peaked in 2003, mobile phone taxes peaked in 2009 at $108 million a year, but fell to $50 million this year, in part because the federal government does not allow states to tax data. In addition, fees for state business licenses have not changed since 1935.
“Wal-Mart opens a store; they buy a license, it costs a dollar,” he said.
The state has established a voluntary sales tax remittance program for online retailers; those participating in it receive a two percent discount on an eight percent sales tax. Mike Gamble, the department secretary for the Department of Revenue, said that had brought in $5.8 million to the state in October.
Gamble also suggested legislators review caps on payments by certain business entities and review tax credits granted.
“Tax credits are popular things but at end of the day, they become essentially grants to entities out there,” he said. “As policymakers, you have to know what the return is and how effective they are, because it does affect our tax base.”
Carter, who presented before the Department of Revenue, said his department was floating several ideas to save money, including allowing state agencies to keep 80 percent of money leftover at the end of the year and remitting the rest to the state; offering voluntary retirement incentives and possibly offering future retirees their pensions in the form of a lump sum payment. Carter stressed that the suggestions were just ideas, and did not have the endorsement of Gov. Robert Bentley.
The Legislature returns on Feb. 7. Bentley will offer his budget proposals in the State of the State address that evening. The Legislature has the final word on the budgets.
©2016 the Montgomery Advertiser (Montgomery, Ala.), Distributed by Tribune Content Agency, LLC.
