For the first time in 15 years, tax receipts in the state’s Education Trust Fund are hitting double-digit growth, prompting the Senate’s budget chairman to say it’s time the Legislature considers possible tax cuts.
While there are still several factors that could influence revenues in fiscal 2022 and 2023 and some growing expenses, Sen. Arthur Orr, R-Decatur, said the Legislature should consider reducing the income tax burden on some fixed-income seniors and families making around $50,000 or less.
“If the stars align correctly, and that’s a mighty big if, I think it’s time to have that discussion about tax cuts and sending money back home, back to the people,” Orr said this week.
Orr said the possible cuts would help retirees and lower-income Alabamians counter increasing inflation rates. An August report from the U.S. Labor Department showed consumer prices jumped 0.5% from June to July. They have increased a substantial 5.4%, though, compared with a year earlier.
Orr said he’s had conversations with some colleagues but hasn’t yet reached the legislation-drafting phase. He said he’s asked the Legislative Services Agency, the Legislature’s non-partisan research arm, to look at how other Southern states tax retirees. Specifically, defined benefit and defined contribution plans.
Currently in Alabama, retirement incomes from 401(k)s and other defined contribution plans are subject to state income tax, paying between 2% and 5%. But Alabamians who have defined benefit plans — including pensions from the state or federal government and the Tennessee Valley Authority — are not taxed on their retirement income.
However, people with 401(k)s are not taxed at the time of contribution; those with pensions are taxed at the time of contribution.
Rep. Lynn Greer, R-Rogersville, for years has been trying to untax defined contribution plans. He’s talked recently to Orr about possible tax cuts.
“Next year is the year to do it,” Greer said this week.
And for lower-income Alabamians, Orr said he wants to look at raising the standard deduction allowed on income taxes.
In the current 2021 budget year, which ends on the final day of this month, the state has already received $335 million more than what was budgeted to meet obligations.
Kirk Fulford, deputy director of the Legislative Services Agency, said the Education Trust Fund (ETF) growth this year is robust.
“However, a major contributing factor to this growth was the stimulus payments to individuals and the various other federal COVID federal assistance,” Fulford said. “The stimulus payments to Alabama residents were almost $11 billion and it appears that much of that one-time money was used for purchases of items subject to sales taxes.
“The ETF will end with double-digit growth, which is unusual, and we have not seen that since 2006. I do not anticipate that the ETF will continue this type of growth long-term.”
Education systems in Alabama received a total of about $4 billion in federal COVID-19 relief funding this year and last.
Orr said lawmakers need to be mindful that the federal relief money will run out in 2023.
“So we don’t need to overshoot our mark by overspending or making a lot of commitments that we can’t live up to when those federal dollars dissipate and go away,” Orr said.
Meanwhile, COVID-19 and the delta variant may continue to impact the state’s economy.
For fiscal 2022, which begins Oct. 1, lawmakers and Gov. Kay Ivey in the spring approved a record $7.6 billion budget.
Looking at fiscal 2023, Orr said he expects raises for education employees and a bonus for retirees. There could be other cost increases, including retiree pensions, step raise increases and bonuses for qualified math and science teachers who agree to teach in hard-to-fill locations, including rural and high-poverty school systems. The bonuses would be about $15,000 per year for middle and high school teachers.
But if lawmakers can take care of the “must haves” in the 2023 budget and address the declining federal COVID dollars to the state and individuals, Orr argues it’s the right time to discuss a tax break for retirees and lower-income families.
“As long as it doesn’t come at the expense of quality education in Alabama — and there is certainly a lot of future need in education — I think we need to have that conversation in the Legislature about giving the people some of their money back,” he said.