Knight Tax Fairness Plan Passes Senate Committee
This is good news.
The plan would remove the 4% state portion of sales tax on groceries. It would also increase the amount of the standard deduction and the personal exemption for state income taxes. It would also remove the deduction for federal taxes paid.
So — let’s say you’re married, you have two children, you itemize deductions and you pay $20,000 in federal income taxes (which means you’re doing quite well in the income department). That means you’ll add $20,000 to your taxable income. However, you will see a reduction in your taxable income elsewhere because the personal exemption will increase from $1,500 for adults and $300 for children1 to $2,200 across the board. Your taxable income will be reduced by $5,200. Assuming you don’t take any other steps to reduce your taxable income, your state tax liability would increase by $740 ($14,800 x 5%, which is the top income tax rate in Alabama).
Now let’s assume you spend an average of $150 a week (before taxes) on groceries. That might be a bit low if those two kids are teenagers. You’ll see your annual grocery bill reduced by $312 a year.
Meanwhile, the increases in standard deductions2 and personal exemptions will effectively raise the threshold at which a family of four begins paying income tax from $12,600 to $20,000.
On a macro level:
According to a model run by the state Department of Revenue and provided by the Legislative Fiscal Office, about 1.5 million state income tax filers, which is 68 percent of the tax filers in the state, would save money or break even on the income-tax portion of Knight’s plan. All of those filers would pay lower taxes overall under the plan because it also would remove the state sales tax from groceries.
The model also showed that about 700,000 income tax filers, or 32 percent, would pay more in state income taxes under Knight’s plan. But some of them, probably more than 100,000, still would pay less in net state taxes. Their savings from the sales tax break, as estimated by the fiscal office, would more than offset the increase in their income taxes. [emphasis added]
Of course, your own numbers will vary based on income, family size, grocery expenditures, and whether or not you itemize deductions. If you itemize, a big factor is how well you shelter your income from federal taxes, thereby reducing federal taxes paid. The lower that number, the less impact you’ll see on your Alabama income tax liability. And wealthy people generally excel at sheltering income. I’m not knocking that; it’s smart. But it also makes me less likely to buy the poor-mouthin’ we’re likely to hear coming from those who object to paying a bit more so we can stop taxing low-income families further into poverty.
The point? There is one, I promise. The Knight plan is a constitutional amendment. If it passes the full Senate, it will then go to a vote of the people. You are likely to hear plenty of demagoguing from people who like our upside-down tax system just the way it is. They’ll do their best to persuade the majority of Alabama’s citizens to vote against their own economic best interests. Instead of listening to them, sit down and run the numbers for yourself.
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1Currently, dependent exemptions are graduated based on income. For adjusted gross income above $100,000, the dependent exemption is only $300 (and if you’re paying $20,000 in federal taxes, your AGI is well above $100,000). The Knight plan would raise it to $2,200 for all income levels.
2Currently, the standard deduction is graduated based on income, and the deduction for a couple with AGI of $30,000 or more is $4,000. The Knight plan would make the standard deduction the same as that allowed for federal taxes, which was $5,350 for a single person and $10,700 for a married couple in 2007.
April 23rd, 2008 at 12:15 pm
I have got to say that I am really torn on this issue. Sales taxes are regressive and certainly taxes on food hurt those who have little money to begin with. But taxes are necessary to fund government, and until we reform property taxes then sales taxes are what we’re stuck with. I like that we have to find the funds elsewhere to cover the tax cut (we can’t borrow it from Chinese like GWB is doing) but I must admit to flinching when my personal upper-middle-class pocketbook is affected. Selfish, yes, but that’s how it feels.
So to save someone $30 per month or less, we’re going to screw around with the tax code, in a way that looks like it’s costing me more. If someone sees that deduction being lost in one big chunk, it’s hard to remember that I saved a little each month the year before.
I also am curious how “food” is defined. It is like what you can use food stamps for?
April 23rd, 2008 at 12:25 pm
Lisa, our income tax code as it currently exists is also regressive, seeing as how the tax threshold for a family of four is well below the poverty line while the top rate is 5%. This is an attempt to make it a bit more progressive without gouging anyone a tremendous amount. The tax reductions that result from the removal of the sales tax on food and from the increase in personal exemptions benefit everyone regardless of income. I know you know this already, but I think it bears repeating.
The House bill is linked in the post, and it contained an extensive definition of “food” that has been stricken. I don’t see an alternate definition in the bill as of now.
April 23rd, 2008 at 1:09 pm
And I agree completely about the property tax situation, but that seems to be one of the third rails of Alabama politics.
April 23rd, 2008 at 2:03 pm
One thing is for sure - the demagogues will be out in force about how this is a tax increase on “responsible” people to fund a “giveaway” to people who already get government benefits anyway. I have a feeling that, with the presidential election thrown in the mix, that it could be a really nasty election season. People out here are scared to death about the economy, and they are very susceptible to fear-mongering. The only thing that might make a difference on the amendment is that if Obama is the nominee, then there will be a lot of new people voting, most of whom would probably support the amendment.
April 23rd, 2008 at 4:47 pm
One thing is for sure - the demagogues will be out in force about how this is a tax increase on “responsible” people to fund a “giveaway” to people who already get government benefits anyway.
Oh, absolutely. And totally ignoring the government benefits the “responsible” people get. I was so disappointed at Bob Riley’s turnaround on tax reform, but I guess it’s understandable if he has any further political aspirations. The PTB nearly took him down over Amendment One, and they’ve likely told him another attempt would be the end of his career.
April 24th, 2008 at 6:07 am
One point I haven’t heard mentioned is that the poorest of the poor qualify for food stamps and I don’t think any sales tax of any sort is added to their bills when they use them to purchase food, so what do they gain with that portion of this bill?
April 24th, 2008 at 7:59 am
Don, if that’s correct, then I guess they don’t gain from the sales tax cut on groceries they buy with food stamps, but they would see a reduction on any groceries they buy beyond their food stamp allotment. Also, they would likely benefit from the higher income tax threshold.
I would think one big selling point for the plan is that the tax reductions (whether the grocery tax or the increases in personal exemption and standard deduction) benefit people across all income levels. Lisa’s correct that it will be hard to get those who take a one-time hit on their itemized deductions to see the benefit of the lower grocery tax that comes in a bit at a time, but this really shouldn’t be a tough sell for the majority of taxpayers who will see a reduction in their grocery bill and their income tax bill. Of course, this is Alabama, and we seem to be allergic to any mention of the T-word.
April 25th, 2008 at 8:16 am
Kathy, when you say one-time hit, do you mean that it will be visible as one payment rather than a hundred-some savings on grocery trips? Because this looks like a year after year hit to me, and for those of us in the higher brackets, the savings at the Winn-Dixie will not outweigh the expenditure on April 15.
As I already commented on Dan’s blog, I am happy to pay it - it’s embarrassing to live in a state that rides on the backs of the poor. But those who claim that wealthier folks are funding this are, I’m afraid, essentially correct. I guess the difference is whether you think that’s a good idea.
I’ve never understood why the state tax should give you a deduction for federal taxes paid, anyway. If anything, it seems like it ought to be the other way around.
Don, from my googling yesterday, I think that Alabama used to charge tax on food stamp purchases, but no longer does. Perhaps they were forced to stop. Here it looks like they were being sued about it.
April 25th, 2008 at 10:07 am
Del, yes, I’m talking about one-time hit in terms of once a year, and I’m not claiming that the tax breaks will outweigh the increase for those in higher brackets. They will, however, mitigate it, and I emphasize that point because I expect it will be glossed over by the PTB who want to maintain the status quo. I also, to my sorrow, expect that a large percentage of the people who would benefit the most will vote against the amendment should it get on the ballot.
Alabama is one of only two or three states that still allow the federal tax deduction. Can’t remember the other(s) right off the top of my head.
April 25th, 2008 at 10:26 am
Surely the number of people making less than $125,000 a year, or whatever the point is at which you start losing money instead of breaking even, far exceeds the number of people making more. I can’t understand how people vote against their own interests on this kind of issue. Maybe they imagine that soon they too will be in that tax bracket, or maybe they just want to vote as though they were.
April 25th, 2008 at 10:39 am
Around the time we were offered “Amendment One” Representative Knight was one of those who were saying that the sky was falling and essential state services would have to be drastically cut if sources of new revenue weren’t found. I sent him an email which he never even acknowledged receiving. I said that anyone who just glanced at business news should be aware that the economy was on the verge of improving which would largely negate his argument (as it did very soon thereafter), but that if the state really did need additional revenue then the legislators should pick up a copy of the state Form 40 tax booklet and go to the section where the various incomes that are not required to be reported are listed and consider making changes there.
Look at that section in your booklet and you will see how many groups don’t have to report certain income, including many former state employees. Many of the people who are in these groups are very well off financially and don’t need that exemption. One group includes me, but I believe in paying my fair share if everyone else will even though I need to keep every penny I can.
April 25th, 2008 at 11:09 am
Don, while it’s true that the Education Trust Fund does better in a good economy, dependent as it is on sales and income tax, the General Fund budget (Medicaid, other childrens’ services, etc.) goes hurting pretty much all the time. I’d like to see our legislature tackle the real third rail of tax reform, property taxes, but Alfa and its minions will never allow legislation that would require out of state timber companies and agribusinesses to pay reasonable taxes on their Alabama property. We’ll never have a stable tax base without adequate property tax revenues, but I applaud Rep. Knight and the people at Alabama Arise for doing what they can to make the system a bit more fair.
April 25th, 2008 at 1:30 pm
Kathy, I agree that our tax code needs to be revised, but almost any way you can devise to change it will gore someone’s ox. The special interests who might be negatively affected and some huge strong oxen.
There is however, at least one other approach, I think, to insure that essential services are better funded at times. If so much revenue weren’t earmarked by law, either the legislature or the governor, or both in unison, could use revenue where it’s most needed in any fiscal year. Another approach would be for the governor to be given the power of line item veto to eliminate a lot of spending by legislators (district pork) to help insure their re-lection. Some of those pork providers have made a career living off the taxpayers and the only ones to benefit are their own constituents.
I agree that property taxes need to be revised, but not at the expense of less than affluent home owners, small family farmers, or small businesses that are creating employment for Alabamians. Large commercial land owners or (the timber businesses, large commercial farming operations, etc.) should be taxed at a more reasonable rate. If they lease land rather than owning it, the owners should be taxed the same way and they can just pass along the additional cost to the commercial interests…..who, of course, will then pass it along to their consumers (call it a consumption tax), but at least some of those will be outside Alabama.
Don’t hold your breath waiting on the legislature to make any such changes, though. The best, and possibly only hope of seeing them made, is for thousands of Alabama voters to make such a loud and continuing demand that the legislature pass the key to open that door for us that legislators become fearful of losing all of their power at the polls if they don’t comply. That key, of course, (you must know coming from me) is for Alabama to become the 25th state to have an Initiative and Referendum process that voters can use to introduce legislation that will bypass both the legislature and the governor and be put on a ballot for voters to accept or reject.
April 25th, 2008 at 1:33 pm
CORRECTION: “The special interests who might be negatively affected and some huge strong oxen.” should read, “The special interests who might be negatively affected are some huge strong oxen.”