12/12/95

Janet McCoy (mccoyjl@mail.auburn.edu)

(Editors: The following is offered for your consideration as a possible op-ed piece)

INCOME TAX REFORM REQUIRES CONSTITUTIONAL CHANGE

A leading state senator, Sen. Gerald Dial of Lineville, recently proposed a major constitutional reform for the income tax, changing Alabama's income tax so it would be based on the federal system. The senator suggested that the tax change be revenue neutral, meeting the political promise of no new taxes. Another stated benefit of the change would be to reduce the audit staff of the state Department of Revenue.

In the proposed changes, everyone would file based on tax liability to the federal government, significantly cleaning up the negatives of the Alabama income tax as we know them. For example, in a progressive tax system those most able to pay are asked to pay at the highest rates. Currently the Alabama income tax is essentially a flat tax, with a rate of 5 percent on only $3,000 on net taxable income for a single person and $6,000 for married persons. But taxation starts at only $500 and $1,000 for single and married taxpayers, respectively.

The lowest income persons in the state would benefit the most from the changes. Rather than begin paying at only $500 of net taxable income, people would not begin paying until their income reached the minimum level of taxation at the federal level. That would remove some 100,000 of the lowest income taxpayers from Alabama tax rolls. The loss in dollars would be relatively insignificant, but the benefit to those who currently have the highest relative tax burden would be significant.

In the revenue neutral tax reform scenario, those with the highest incomes will pay more taxes, but those are the persons who are most able to pay. The amount of the increase may not be significant since the increase is probably only some 6 percent of total income tax collections or, some $80 to $100 million. Divided equally among all the rest of the taxpayers, it would mean an average increase of $116 to $144 per taxpayer. Remember, the beneficiaries are the working poor, people who work every day, except they make less money per hour for their efforts. Persons on welfare are left out of this scenario since they do not pay any income taxes.

The real impact of this proposed tax reform is that all of the progressiveness of the federal income tax structure would accrue and federal rates based on ability to pay would become the nominal rates. The federal income tax rates start at 15 percent of income and increase marginally until the higher rate of 39 percent of taxable income is reached at $250,000. This progressive improvement in Alabama's tax code would exclude federal income tax as a state tax deduction, increasing state income tax revenues some $350 million dollars. But ALL will benefit because the tax becomes more fair to and is simple to calculate. Once federal income tax liability is calculated, a single Alabama state income tax rate of some 18 to 21 percent would be applied. If federal tax liability were $1,000, state tax liability would be $180 to $210. With a postcard sized tax form to complete, a refund would be requested or a check written for taxes due.

Some will be concerned, but the most fair change of all will be the new treatment for retirement incomes. Those persons whose entire income is from Social Security will not owe ANY tax because their income will fall below the federal minimums. With these changes, all persons income will be as defined by the federal tax code including taxes on retired teachers, government employees, military retirees and those in defined pension plans. All taxpayers will be taxed based on ability to pay, correcting a system that is inherently unfair. Retirement income should have never been singled out for special treatment just as no one group should be set apart for negative treatment.

In the final analysis, the people must decide to change the constitution to effectively change the income tax. The tax policy of the state of Alabama should be changed to follow the federal tax code for definition of income and for determinations of exemptions, deductions and credits. The base for the calculation of the Alabama tax liability should be the line identified by the federal tax forms as the "taxes owed." That is what reduces the state form to the size of a "postcard."

Check-offs currently on the income tax form deserve continuing state funding. The reason check-offs were adopted was because of the failure of the state to adequately budget in these areas the public considers important. The policy of the state should be to guarantee each of these check-off items continued funding from the appropriate fund, and provide for increases over the next several years.

Any reduction in force as a result of reform can take place if that is good policy. But the policy should provide for an adequate audit staff which works just as diligently in review of cheats and innocent errors as they do today. We will not, however, need the army of clerks required to handle all of the tax forms that are received under the present system. Reductions in force should be left to the Commissioner of the Department of Revenue and the Legislature which adopts a budget based on the governor's recommendations.

The Alabama Constitution contains restrictions on the income tax which can only be changed in a referendum. Alabama has used the constitution to impose what would normally be statutory law in other states. By placing provisions in the constitution, income tax changes as proposed by Sen. Dial are exceptionally difficult to achieve. One final caveat. From long experience, the new section for the constitution, should be written in plain, simple language, not the arcane language that fills the Constitution of 1901, as amended, boggles the mind and defies explanation, even by those who created the language.

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(Ward is an associate professor of political science at Auburn University and director of AU's Center for Governmental Services, which is sponsoring a symposium on Alabama's 1901 Constitution Dec. 13-15 in Montgomery.)

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