A red state with a case of the blues

Published 11:00 pm Wednesday, September 5, 2012

The state of the economy in Alabama is not good. Our state unemployment rate of 8.3 percent, which is keeping up with the US average, has ticked up in recent months. Underemployment rates, which capture part-time workers who want to work full-time, are near 15 percent. Along with high unemployment rolls, our state is home to a disproportionate share of cities and counties in extreme poverty and a number of troubling social trends.

Though many state leaders claim Alabama is a state with low taxes and bare bones government services, the facts are much different. By standard measures, Alabama’s taxes are high and complex. According to the Tax Foundation, Alabama’s average rate of state and local taxes for 2012 was 8.33 percent, which means there are just 7 states with higher effective tax rates than us.

In addition to high tax rates, we have a host of distortionary targeted taxes. For example, Alabamians wanting a good drink pay some of the highest spirits taxes in the country. Most businesses locating in Alabama, meanwhile, must pay a business privilege tax for the right to work under Alabama laws. With 8.3 percent unemployment, shouldn’t lawmakers be begging businesses for the privilege to be their hosts?

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Our overall tax policies are worse than many of the states we border, which means we have a regional disadvantage for attracting businesses and productive people; if our taxes remain high, we will continue to lose people and business to states like Florida and Georgia, which have better tax rankings.

Some state leaders try to distract from the issue by shifting away from tax rates. They ask people to focus instead on total taxes paid. In absolute terms, Alabamians appear to pay a low total dollar amount in taxes. But, their argument often leaves out a critical fact: Alabama is well below the median for household incomes, so one would hope taxes paid are also lower here. Tax rates are the key indicator of a state’s growth environment, and Alabama is behind national trends when it comes to our tax rates.

As I’ve stated in previous columns, reforming our tax code is not complicated, and we have good examples from states like Florida and Texas. Since we have too many taxes, and since taxes are too high, some taxes should be abandoned and some rates should be lowered. We are behind our neighbors when it comes to tax policy, and policies should be advanced to eliminate one of our two major taxes—either the income tax or the sales tax—to make us more competitive.

Of course, any discussion of tax reform must be accompanied by a discussion of constraining spending. In the area of spending, the rhetoric of Alabama as a state with small government doesn’t match the reality: Our state spends a lot of money, and the trend has been in the direction of bigger and bigger government. According to an Alabama Policy Institute policy piece, for every 100 people employed in the private sector in Alabama, 21 are employed in local or state government jobs, which makes us the 11th worst state in the nation for public/private employment ratios. Since 1969, state and local government employment in Alabama has grown by 114 percent. To support the growth in spending, lawmakers have let state and local budgets rise: 25 percent of gross domestic product in Alabama comes from government spending, which makes us the 12th worst state in the US for state and local spending. For a red state with politicians committed to limited government, lawmakers sure seem to have taken to spending like they’re fans of big government.

Rather than continue the current course of high spending and high taxes, it’s time for a return to fiscal sanity in Alabama. Like our nation, Alabama is at a critical juncture: Shall we continue to promote more of the same when it comes to economic policy in Alabama or will we set Alabama policies on a better long-term course?


Scott Beaulier is Executive Director of the Manuel H. Johnson Center for Political Economy at Troy University.