Riley’s tax package what will it mean to our pocketbooks?
Editor’s Note: This is the fourth in a series leading up to the Sept. 9 statewide vote.
A cadet received a salary of $7,000 for time he spent at the U.S. Naval Academy.
He paid $4,600 of that in taxes to the state of Alabama.
According to proponents of Gov. Bob Riley’s tax and accountability package, inadequacies such as this one will end with its passage on Sept. 9.
Gov. Riley has said, since he introduced his tax package earlier in the year, that one of the main goals was to make taxation in Alabama more fair.
To that end, according to information from the Alabama Partnership for Progress which is working for passage of Amendment 1, the governor will increase the threshold at which residents must pay income taxes.
Currently, a family of four in Alabama must begin paying income taxes with an annual income of
$4,600, the lowest in the nation.
In comparison, Mississippi exempts the first $19,000 of income from taxation for the same family.
If approved, Amendment 1 will exempt the first $20,000 from taxation.
Aside from income tax changes, Alabama residents will also face changes in cigarette taxes, other sales taxes, deed and mortgage recording taxes, business privilege taxes, taxes on financial institutions, utility taxes and significant property tax changes.
According to Shelby County finance manager Butch Burbage, the county will receive at least an additional $752,441 if Amendment 1 is approved by the state.
Much of the increase in tax revenue flows directly to the state, he said.
The additional county revenue would consist of increases in ad valorem, or property taxes, and changes in current use policies along with increased sales taxes on services.
The first year, for example, the county would see increased sales tax on lube oil and service of $241,091; $245,912 in 2005; $271,507 in 2010; $330,966 in 2020.
Explanations of the proposed changes to income taxes, cigarette taxes and sales taxes follows.
Next week’s edition of the Reporter will discuss changes in property taxes, utility taxes, recording taxes, business privilege taxes and taxes on financial institutions.
Changes in the collection of state income taxes will generate an estimated $2.9 billion during the next six years, according to the state finance department, $417 million in 2004 alone.
Among the most debated of the changes is the elimination of federal income tax credit.
Currently, state income tax is charged only on net income, after federal income tax has already been deducted. Gov. Riley’s plan would tax gross income, the total amount prior to federal income tax deduction.
For example, a person with an annual salary of $30,000, currently taxed at about 11 percent federally has a net income of $26,700. State income taxes are then deducted from that $26,700 (about $935) for a take-home amount of about $25,765.
If Amendment 1 passes, that same individual would face state income taxes deducted from their total salary of $30,000 at an increased rate of 5 percent ($1,050) leaving a take-home amount of $25,650.
In Shelby County, the median income for a family of four is $64,105.
A married couple filing jointly is in the 27 percent federal tax bracket.
Currently, that couple would pay some $17,308 in federal income taxes annually, leaving a net income of $46,797 to be taxed by the state.
At 5 percent, that couple would pay some $2,340 in state income taxes.
With passage of Amendment 1 on Sept. 9, that couple would pay state income taxes on their gross income, $64,105. At 5 percent, they would pay $3,205 to the state, leaving a take-home amount of some $43,592.
Other deductions which will no longer be allowed include deductions for occupational taxes, property taxes, casualty losses, some medical expenses and many of the specialized deductions.
The amendment also changes Alabama’s standard deduction amounts from $4,700 for single to $4,750; $7,850 for those who are married filing jointly to $7,950; $3,925 for those married filing separately to $3,975 and $6,900 for those filing head of household to $7,000.
While the income tax rates increase for residents, the rates decrease for corporations from 6.5 percent to 6 percent.
Other income tax changes include
raising the child tax exemption from $300 to $2,100 in the first year alone, tying the amount to the federal exemption and deduction levels after that. According to the Partnership for Progress, that amount has not changed in Alabama since the Depression.
creating a new exemption for the first $40,000 of pension income, such as 401ks or IRAs.
Deductions will still be allowed for mortgage interest, charitable contributions, some medical care and adoption expenses.
Exemptions for all defined benefit pension income such as teacher retirement, government plans and large company plans will continue.
Shelby County’s municipalities have reacted en masse to the threat of a moratorium on cigarette taxes should Gov. Riley’s Amendment 1 pass on Sept. 9.
With passage of the tax and accountability package, local municipalities are prohibited from increasing tobacco taxes.
During the past couple of weeks, the cities of Montevallo, Calera and Columbiana have passed their own tobacco taxes in preparation for the vote.
And the city of Helena will discuss passage of its own tobacco tax at its next meeting.
Should the governor’s tax package pass, cigarette taxes would increase from 16.5 cents to 31 cents. The taxes on all other tobacco products would double.
According to figures from the state Finance Department, this increase would provide about $48 million in additional revenue during 2004, $52.4 million during 2005.
In Calera, the tax on cigarettes was set at 10 cents per package of 20 and 10 cents per package of smoking tobacco, chewing tobacco, smokeless tobacco and snuff.
Cigars made of tobacco or tobacco substitute will be taxed at 1 cent apiece.
In Montevallo, the tax on cigarettes was set at 10 cents per package of 20.
In Columbiana, the tax on cigarettes was changed from 5 to 10 cents per package.
During the legislative session, a one-cent tax was levied on cigarettes in Shelby County for the benefit of the district attorney’s office.
Changes in sales taxes in Alabama would generate about $139 million should Amendment 1 be approved by voters.
The plan imposes a 4 percent sales tax plus county sales taxes on warranty and service contracts and labor costs for product installations and repairs, such as replacing car parts or installing appliances in houses.
Certain services, however, would not be included such as those provided by lawyers, doctors, dentists, architects, accountants, barbers and cosmetologists.
The amendment also raises the sales tax on new and used cars, trucks, motorboats and motorcycles from 2 to 2.5 percent.
The amendment eliminates the excise taxes on lubricating oil which would cost Shelby County about $14,000 each year through 2006. Total loss through 2020 would be about $283,190.
Lube oil and services would be subject to sales taxes which would, in turn, generate funds for Shelby County, according to finance director Burbage, to offset the loss of the excise tax plus additional funds.
The amendment also increases the rental tax on vehicles from 1.5 percent to 3 percent.
At the polls
When voters go to the polls Sept. 9, the amendment they will be faced with will read (according to the Alabama Secretary of State’s office): &uot;Proposing an amendment to the Constitution of Alabama of 1901, establishing the Alabama Excellence Initiative Fund which may be used to fund programs including, but not limited to, the furtherance of excellence in public education, college scholarships, healthcare benefits for senior citizens and job training programs to attract new high-paying jobs and otherwise provide for distributing state tax revenues; to adjust income and property taxes; to establish the General Fund Rainy Day Account; to provide for the replenishment of the General Fund Rainy Day Account and the Education Trust Fund Rainy Day Account.&uot;
‘Yes’ will mean a voter chooses to accept the reforms put forth by the governor; a ‘no’ vote will mean a voter chooses not to accept the reforms.
Next week’s installment of this series will deal with the actual tax changes which are associated with the plan and their affect on Shelby County