Saturday, August 30, 2003

An Alabama Tax Reform Overview Before we go into the pros and cons from a economic or biblical perspective, let's see what they're voting on. Here's a summary document of the plan. The package would: (1) Nearly double cigarette taxes from 16.5 to 31 cents a pack. That's actually a bit regressive, since poor people tend to smoke more. However, if you tax something, you get less of it, and if you have to get tax revenue from somewhere, this is a good one, since less smoking is a good thing. (2) Shift property tax burden to the wealthy and to the agribusiness and timber industry- The plan cuts the state property tax rate from 0.65% to 0.35%, but it increases that taxable amount of property. Currently, houses, farm and timberland have only 10% of their property's value subject to tax, business property is taxed at 20% and utility property is taxed at 30%. This would be a four-fold increase in taxes paid for people with 10% property. However, the plan gives the little guy three breaks. Homeowners are not taxed on the first $50,000 in property value under the new plan, as opposed to $4,000 now. If you have a home worth more than $60,000, you'll be paying more in property taxes. Farmers get a 200 acre or $150,000 exemption. A key provision limits the current use tax break to 2000 acres. Currently, undeveloped property that would be more valuable as subdivision, mall or industrial property is taxed at the undeveloped rate. This would be helpful for smaller landowners, but the big timber companies will have far more than 2000 acres of land that falls into this category. (3) Increase a number of special sales taxes. Vehicle sales tax goes up 0.5%. Repair services and motor oil get taxed 4%. Vehicle rentals go up 1.5% That might not sound like much, but these increased sales taxes are slated to bring in $210 million, and seem to effect everybody. (4) Raise the exemptions and individual deductions on the state income tax. Today, a family of four would have the first $5200 exempted; the new plan would up it to ~$16,250. That's one of the big progressive arguments for the plan. (5) Get rid of exemptions for deductibility of federal income tax, Social Security and Medicare payroll taxes and property taxes. For many middle-income families, that will wipe out the gains from the exemptions and deductions. (6) Raise the top state income tax bracket from 5 to 6%.-Families making more than $150,000 will pay that higher rate. Who does this help? Small farmers and owners of small homes. People with incomes under $40,000 or so. The do-it-yourself industry, since repair services are now 4% more expensive. Who does this hurt? Business in general, especially large corporations. The timber industry takes it in the teeth. It hurts renters. Rent will go up by about a quarter-percent with the higher property taxes. It hurts car buyers; cars will a half-percent more expensive. It hurts the person with an older house, since repair bills just went up 4%. It will hurt the environment, for some of the timber land close to town may well be sold off and developed if Big Timber has to pay subdivision property tax rates on timberland. That will be one unintended consequence of that 2000-acre rule. It will hurt consumers in general, as the extra property tax on business property, repair tax and car tax will make things more expensive to do. Even if you don't buy cars, repairs or business property, the people who sell you stuff do, and that cost will be passed on in large part to the consumer. A half-percent boost to the cost of living in Alabama would be a fair guess. Inflation is a hidden tax, hurting everyone. So will the general drain on business that the higher taxes will cause. You may well see a form of localized stagflation kick in, as the higher taxes raise costs and thus raise prices to the general public and also cause firms thinking about setting up shop in Alabama think otherwise, especially if the company has a lot of high-paying jobs that will be taxed extra in the new progressive Alabama. There are parts of the plan that make sense. The increase in exemptions is good, as is some re-arrangement of the property tax burden. However, it looks like Riley and friends are sneaking in a ill-advised tax increase as sound Biblical finance.

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