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NTU Urges Opposition to Governor Bentley's Proposed Tax Hikes

by Clark Packard / /

Dear Members of the Alabama Legislature:

As you prepare for Special Session to address an approximately $200 million General Fund shortfall for the next fiscal year, National Taxpayers Union (NTU) urges you to oppose the $302 million in tax increases proposed by Governor Robert Bentley.  Rather than drastically raising taxes on hardworking Alabamians, NTU strongly encourages you to bring government spending in line with projected existing revenue. Simply put, your constituents cannot afford Governor Bentley’s tax-and-spend policies.

The largest component of Governor Bentley’s proposed tax hikes is the elimination of the state income tax deduction for Federal Insurance Contribution Act (FICA) taxes, which proponents claim will raise $182 million annually. FICA is a 6.2 percent levy employees pay on wages earned up to $117,000 annually to fund Social Security and Medicare. Given its cap, the FICA tax is regressive and eliminating the state income tax deduction would force more moderate-income Alabamians to shoulder a disproportionately large share of this tax increase. Furthermore, forcing residents to pay a state tax on money they have already paid to another government is problematic.

As an alternative to eliminating the FICA tax deduction, Governor Bentley proposed a soft drink tax of 5 cents per 12 ounces. Citizens who do the math will realize that such an amount would easily add up to a double-digit tax rate on commonly purchased six- and twelve-packs. This proposal would generate an estimated $182 million in revenue for the next fiscal year. The targeted tax would harm consumers through higher grocery bills and stick the beverage industry, which employs thousands of Alabamians, with unnecessary costs. Like its alternative, this is misguided fiscal policy.

Another ill-conceived idea contained in the Governor’s proposal is a 25 cent-per-pack increase in the cigarette tax. There are a number of problems with raising cigarette and tobacco taxes. Cigarette taxes are highly regressive, affecting low-income earners far more than high-income earners. In addition, tobacco sales account for approximately one third of all sales at convenience stores, according to the National Association of Convenience Stores. Increasing costs on small businesses is not wise policy in an Alabama economy with an unemployment rate persistently hovering above the national average.

Finally, cigarette taxes usually yield far less revenue than proponents projected. A 2013 study by NTU’s research arm, the National Taxpayers Union Foundation, found that revenue projections were met in only 29 of 101 cases where cigarette and tobacco taxes were increased between 2001 and 2011. That same study found that over the same period, tobacco tax increases were followed by other tax hikes nearly 70 percent of the time after actual revenues fell short of projections. In other words, Governor Bentley’s tobacco tax will likely yield far less revenue than projected and possibly open the door to bigger government in the future.

The Governor’s proposal would also institute a 25 cent-per-milliliter tax on electronic cigarettes and vapor products. The state already collects taxes on the sales of these items, but this proposed excise tax is a dreadful idea. These products pose significantly less of a health risk than traditional cigarettes, as a spokesman for the Food and Drug Administration (FDA) admitted in congressional testimony last year –confirming what countless other studies have shown. In addition, instituting an excise tax threatens up to 2,000 jobs in the state, according to the Breathe Easier Alliance of Alabama. None of Alabama’s neighboring states impose similar taxes on vapor and e-cigarettes. By instituting such an excise tax, Alabama will incentivize residents using these products to purchase them out-of-state, further hampering the state’s already struggling economy.

The final pernicious proposal included in Governor Bentley’s tax hike plan would raise the maximum business privilege tax from $15,000 to $25,000. Corporations already pay a 6.5 percent tax on income earned in Alabama, making its corporate income tax one of the highest in the southeast. Increasing the business privilege cap by 67 percent is indefensible given the stubbornly high unemployment rate in Alabama.

Over the last decade, Alabama government has spent well above the rate of inflation plus population growth. The budget passed by the Legislature, while not perfect, was vastly superior to the additional tax and spending hikes proposed by Governor Bentley. NTU urges you to reject the Governor’s spendthrift policies by reining in expenditures and avoiding burdening the economy with higher taxes.

Sincerely,

Clark Packard
Policy and Government Affairs Manager