The Alabama Legislature kicks off its 2011 Regular Session today in Montgomery. The session promises to be a challenging one for lawmakers facing significant budget deficits in both the Special Education Trust Fund (“ETF”) and the General Fund. While both Legislative leaders and new Republican Governor Robert Bentley have pledged to cut spending to meet the shortfall, many analysts are skeptical that enough spending can be cut to make up for the missing revenues.
Recently, at organizational meetings of the legislative members in Montgomery, the Legislative Fiscal Office (“LFO”) presented some very sobering information to assist legislators in the upcoming budgeting process.
Specifically, LFO advised legislators that the ETF is currently facing a deficit of more than $126 million for fiscal year 2011. Even more disturbing was the revelation that given current information, LFO predicts that the ETF will face a shortfall of more than $687 million in the 2012 fiscal year.
Likewise, Alabama’s General Fund is facing substantial deficits. LFO estimates that the General Fund will have a shortfall of over $131 million for fiscal year 2011 and a staggering $554 million in fiscal year 2012.
Of course, it should be noted that these numbers are current estimates and may improve somewhat if tax collections continue to increase. The Alabama Department of Revenue recently released information indicating that through January, total tax collections were up 6.2% for the current fiscal year over the previous fiscal year. Those collections are still far below the levels seen in the pre-Great Recession days, but trending in the right direction.
Yesterday, in anticipation of the looming budget shortfalls, Governor Bentley ordered 3% proration of the education budget immediately and advised that he would order 15% proration the General Fund budget soon.
In addition to the budget woes facing legislators, there are several tax related bills in the hopper for consideration by this year’s legislature. Among those include the following…
Incentives. The Tuscaloosa News reports that one proposed bill would give tax credits to employers who hire a certain number of people or expand their business with new jobs. It would give greater credits in distressed areas of the state and minimal credits in more developed areas. The amount of the tax credits would also depend on the number of jobs created, the wages paid, and the counties in which the jobs are located.
In order to qualify for the job tax credit, employers would have to add at least 10 full-time jobs and retain those jobs for at least two years. The credit would max out at $8,000 for each new full-time job in a underdeveloped county, but would be decrease to as small as $1,500 per job in more developed counties.
For smaller employers, those with 99 or fewer employees, a jobs tax credit would be available if they increase employment by two or more full-time jobs provided the gross wages of the jobs created amount to a minimum of 120% of the county or state average per capita income, whichever is lower. The maximum credit would be $4,000 for each new job in a distressed county and correspondingly less, down to $750, for each new job in a developed county.
Tax credits also would be available to businesses for new construction and infrastructure improvements.
Taxpayers' Bill of Rights. A coalition of groups has been crafting legislation to update Alabama’s Taxpayers' Bill of Rights.
The proposed bill would amend the law to include broader “innocent spouse” type relief and make technical corrections to remove ambiguities and conflicts in the law. The bill would also require certain state tax returns to be filed as a result of IRS audit changes and increase a taxpayer’s penalties for certain actions, consistent with federal law. The bill would increase the time period in which a taxpayer has to file an appeal of a preliminary or final assessment from 30 to 60 days. It would increase the fee for a revenue ruling request from $200 to $300, and allow the Department of Revenue to issue revenue procedures applicable to a particular industry or group of taxpayers.
This bill would abolish the Administrative Law Division of the Department of Revenue, and provide for the creation and operation of a new, independent state agency, the Alabama Tax Appeals Commission, to hear appeals of tax and other matters administered by the Department of Revenue, and appeals related to certain local taxes levied by or on behalf of self-administered counties or municipalities, unless the governing body elects out.
Property Taxes Adjustments. Under existing law, the principal residence of a totally disabled person or a person 65 years of age or older having a taxable income of $7,500 or less is exempt from ad valorem taxation. One bill introduced would increase the income limit for the tax exemption to $15,000.
Another bill would provide that beginning with the fiscal year ending September 30, 2010, and each fiscal year thereafter, the homestead exemption amounts provided for in the Alabama Code would be adjusted annually to reflect any increase in the cost of living. Those amounts are not currently adjusted.
Yet another bill would raise the homestead exemption to $8,000.
Deduction for Health Insurance Premiums. Under current Alabama law, in addition to any other income tax deduction that a qualifying employee may be entitled to with respect to the payment of health insurance premiums, qualifying employees are allowed to deduct from Alabama gross income 50% of the amount they pay as health insurance premiums as part of an employer provided health insurance plan provided by a qualifying employer. Furthermore, under existing law, in addition to any other Alabama income tax deduction that a qualifying employer may be entitled to with respect to the payment of health insurance premiums paid on behalf of qualifying employees, a qualifying employer is allowed as a deduction in the computation of Alabama taxable income 50% of the amount they pay as health insurance premiums on behalf of qualifying employees in connection with an employer provided health insurance plan. Proposed legislation would alter Alabama law to provide that in addition to any other Alabama income tax deduction that a qualifying employee may be entitled to with respect to the payment of health insurance premiums, qualifying employees would be allowed to deduct from Alabama gross income 100% of the amount they pay as health insurance premiums as part of an employer provided health insurance plan provided by a qualifying employer. In addition, the bill would also provide, in addition to any other Alabama income tax deduction that a qualifying employer may be entitled to with respect to the payment of health insurance premiums paid on behalf of qualifying employees, that the employer would be allowed as a deduction in the computation of Alabama taxable income 100% of the amount the employer pays as health insurance premiums on behalf of qualifying employees in connection with an employer provided health insurance plan.
Change in Budget Process. For years, pundits have panned the method Alabama uses in establishing its budgets because they use projected revenues, rather than historical numbers. This often results in proration when the economy takes a downward turn. Under proposed legislation in the Alabama House of Representatives, that would change. Under current law, there is no maximum amount that may be appropriated annually from the ETF. Appropriations are based on estimates of the amount of revenue that will be available from all revenue sources to the ETF. The bill provides for a change in the maximum amount that may be appropriated annually from the ETF and provides for the establishment and operation of a budget stabilization fund and a capital fund for the ETF.
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