Taxes and Alabama’s state budget

Published 10:15 pm Wednesday, February 25, 2015

State lawmakers will face a budget deficit in excess of $200 million in the 2015 legislative session.  Unlike Congress, which can mortgage the nation’s future to cover its spending, Alabama’s lawmakers must pass a balanced budget, and will have to either cut spending or increase taxes.  Governor Bentley is expected to propose a $700 million tax hike to address current and projected General Fund deficits.

The annual budget balance drama should come as no surprise.  Alabama and 48 other states have balanced budget rules because lawmakers would otherwise spend and borrow excessively.  If state legislatures could balance their budgets easily, we would not need balanced budget rules.

Alabama’s tax system employs a variety of constitutional constraints on lawmakers’ power to tax in addition to the balanced budget rule, and these add to the budget drama.  An understanding of the role of constitutional tax constraints should inform our deliberations on how to handle the budget shortfall.

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Public choice economists systematically consider the incentives voters, interest groups, politicians and bureaucrats face in democracy.  We examine what types of actions will advance each party’s interests.  Will politicians seeking to win elections make credible campaign promises or promise the moon?  Do voters have an incentive to become informed on the issues, and if not, how will they vote?  We do not assume that democracy automatically and magically promotes the public interest.

In a romantic view of democracy, well informed voters can closely control politicians, like robots or puppets.  Public choice finds that elected officials possess considerable discretion to do what they – or a special interest group – want on many issues.  The hundreds of actions legislators take on our behalf each term – the U.S. House of Representatives cast over 1,500 roll call votes in 2011-12 – provide one source of discretion.  Most issues simply cannot matter very much to voters.  Instead of puppets, the relationship more resembles that between football coaches and players: coaches cannot control players with a joystick on the field.

Constitutional rules allow citizens to beneficially regulate politicians.  To use another football analogy, when Alabama or Auburn prepare to play LSU at Death Valley, the coaches can anticipate that crowd noise will interfere with offensive play calls.  Smart coaches neither ignore the crowd noise factor, nor despair that communication will be impossible – they use hand signals and silent counts.  They plan based on reality, not magic.

Constitutional constraints on taxes and borrowing improve outcomes for citizens.  Politicians will have difficulty saying no to spending money, because spending allows them to score points with voters.  Alabama’s Constitution specifies a maximum rate for income and property taxes.  Once lawmakers impose the maximum allowed rates (which happened long ago), they must ask voters for an increase in income taxes.  The maximum sales tax rate, not capped by the constitution, has been raised 40 times, versus four hikes in the income tax rate.  As a result, Alabama had the lowest state and local tax revenues per person of any state in 2012.

Alabama’s constitution further restricts spending for certain tax revenues through earmarking.  Earmarking assigns specific tax revenues to separate funds, like the General, Educational Trust, and Highway Trust Funds.  Alabama earmarks more than 80% of our tax dollars, more than any other state (the average state earmarks 24% of revenues).  Earmarking reflects a lack of trust that lawmakers would indeed spend money as voters desire.

Constitutional constraints necessarily have costs.  For instance, economic changes can produce an imbalance of earmarked revenues across the funds.  Alabama’s General Fund has been the source of recent budget drama, due to slow growth of its taxes and long term growth in Medicaid spending.

Constitutional tax limits do not prevent taxes from being raised, only ensure that voters have a say over increases.  This I think is valuable, because politicians can too easily convince themselves of the need for higher taxes.  So should Alabama increase taxes to eliminate the budget shortfall?  We should, if our elected officials can convince Alabamians that paying more in taxes will improve our lives.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision.  Respond to him at  

About Dan Sutter

I am the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

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