Alabama legislators have considered several major tax proposals during the current legislative session, including Gov. Robert Bentley’s (R) $541 million tax hike package. Bentley’s plan relies on sin taxes and tourism taxes, which distort markets, decrease economic competitiveness, and encourage unsustainable increases in government spending while placing an unnecessary burden on lower-income taxpayers. Bentley’s plan has not drawn significant support from voters and thus far has not advanced through the legislature.
The newest proposal, introduced by state Sen. Bill Hightower (R-Mobile) takes another approach, aiming to simplify the tax code by introducing a flat tax. Hightower’s Flat Tax Simplification Act would cut the tax rate from 5 percent to 2.75 percent and apply the rate to all income levels. Alabama established its income tax by constitutional amendment in 1933, and the rates have remained unchanged since. Under the new system, overall rates would drop. For many taxpayers not receiving large state deductions or exemptions, the flat tax would amount to a significant tax cut.
The proposed flat tax would also eliminate all state individual income tax deductions and allow tax returns to be filed on a simple postcard or online. Alabama taxpayers would need only to find their adjusted gross income from their federal 1040 tax forms, multiply the amount by .0275, and send the form in. Any deductions would have already been determined in the federal tax return.
Hightower’s bill is a proposed constitutional amendment. Alabama voters will be able to decide whether they approve this tax reform during primary elections in March 2016.
Flat taxes are beneficial for several reasons. They avoid penalizing the citizens who produce the majority of jobs and economic activity with higher tax rates. Flat taxes simplify the tax code by eliminating credits, exemptions, and deductions. Taxpayers no longer need to hire expensive tax accountants or use expensive computer programs to file their state taxes.
Sound tax reform should adhere to four basic principles, argues John Nothdurft of The Heartland Institute: Taxes should be applied to a broad base, kept at a competitive and low rate, be open and transparent to taxpayers, and not distort the economic choices of consumers and businesses. The Flat Tax Simplification Act adheres to these principles. The flat tax is also revenue-neutral. Even after eliminating some $2.8 billion in deductions and special exemptions, the state would still be able to collect its current $3.6 million in annual individual income tax revenue at the lower rate.
Instead of creating and increasing discriminatory taxes like those in Bentley’s proposal, states should implement tax reform that lowers rates, puts dollars back into the pockets of taxpayers, and tightens budgets by creating new, reasonable limits on spending. Hightower’s flat tax lowers rates and simplifies the tax code for Alabama taxpayers and represents an important step in the right direction for tax reform in the state.
The following documents provide additional information on the flat tax.
A Brief Guide to the Flat Tax
Everything you wanted to know about the flat tax is provided in this PolicyFax by Dan Mitchell of The Heritage Foundation. Mitchell says the flat tax eliminates special-interest favoritism and prevents taxpayers from finding tax loopholes by hiring an army of lawyers, accountants, and lobbyists.
Ten Principles of State Fiscal Policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
The Flat Tax: Will It Be Coming to Your State?
This Heartland Institute Research & Commentary explores the growing trend of states and nations moving toward flat-rate income tax systems.
Guide to the Issues: Flat Tax
This article from the Alabama Policy Institute argues a true flat tax is one tax rate applied to all income with no exceptions: “A flat tax would not tax savings and investment, promoting job creating and capital formation. Only income earned inside the national borders of the United States would be taxed.”
The Flat Tax’s Silver Anniversary
Alvin Rabushka, the David and Joan Traitel Senior Fellow at the Hoover Institution, offers a history of the flat-rate income tax. “First proposed 25 years ago, the flat tax has proven most influential in the unlikeliest of places: state capitals—and the capitals of other nations.”
Rich States, Poor States
The seventh edition of this publication from the American Legislative Exchange Council and authors Arthur Laffer, Stephen Moore, and Jonathan Williams offers both individual-state and comparative accounts of the negative effects of income taxes.
The Inequity of the Progressive Income Tax
Kip Hagopian of the Hoover Institution contends the most compelling argument against the use of the progressive income tax is that it is inequitable: “Under a progressive income tax, the welfare of one group in a society has been increased at the expense of the welfare of a different group.” Hagopian dismantles arguments for the progressive income tax and proposes a new doctrine of tax fairness.
The Effect of Progressive Tax Codes
Bill Ahern of the Tax Foundation discusses the effects of different kinds of progressive taxes on taxpayers and the economy.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Logan Pike, Heartland’s state government relations manager, at [email protected] or 312/377-4000.