Alabama state Sen. Bill Hightower (R-Mobile) is proposing a constitutional amendment to reduce and flatten the state’s income tax.
Hightower’s proposed amendment, if placed before and approved by voters, will cut the top tax rate from 5 percent to 2.75 percent and apply that rate to all income levels. It would also eliminate nearly all of the state’s income tax credits, exemptions, and deductions.
Hightower says the many small, targeted tax credits and exemptions have a large effect on the state’s budget.
“Over the last 65-plus years, legislators like myself have passed little credits, little exemptions, little deductions, and it doesn’t amount to much, but if you add them all together, it’s over $2 billion of our budget,” Hightower said.
By eliminating tax carve-outs, Hightower says the income tax rate can be cut nearly in half.
“When I was elected to the state legislature two years ago, I began to investigate what would happen if we eliminated the over 100 exemptions, credits, and deductions,” Hightower said. “How low could we get the taxes? I eventually learned that we could get it down to 2.75 percent. In other words, almost half our existing rate.”
‘They Think It Makes Sense’
Hightower says reducing the complexity of the Alabama tax code is popular among his constituents.
“The support has been overwhelming,” Hightower said. “The public has been very excited about the possibility. They think it makes sense. They wondered why Alabama’s code is so complex.”
Hightower says he’s looking forward to ripping up the state’s voluminous tax code.
“Imagine eliminating all the credits, exemptions, and deductions, how many pages of the tax code we’ll be able to rip out—it’s incredible!” Hightower said.
Getting Rid of Rent-Seekers
Tax Foundation economist Kyle Pomerleau says Hightower’s proposal needs some refinement but is a step in the right direction.
“The proposed Alabama flat tax does not look as though it has an exemption for capital gains and dividends,” Pomerleau said. “Alternatively, instead of exempting capital gains and dividends, Alabama should allow people to deduct the amount of money that they save.
“I would say that there certainly are positives to this proposal,” Pomerlau said. “It does move in the direction of getting rid of the rent-seeking behaviors of either businesses or individuals, because it gets rid of a lot of deductions and credits, but there are some shortcomings of the plan. It doesn’t exactly mirror what a flat tax should be, but I do think it’s a step in the right direction.”
Pomerleau says Hightower’s bill is a positive development, despite its flaws.
“This is how we should be talking about tax reform at both the state and federal levels, going toward simplification and defining income in a very straightforward way, and I think this proposal does that,” Pomerleau said.
Elizabeth BeShears ([email protected]) writes from Birmingham, Alabama.
Juan Carlos Conesa and Dirk Krueger, National Bureau of Economic Research, “On the Optimal Progressivity of the Income Tax Code”: https://heartland.org/policy-documents/optimal-progressivity-income-tax-code/