While most of Montgomery was arguing over whether to raise taxes, State Sen. Bill Hightower was gaining momentum for a bill aimed not only at lowering state income taxes but also at streamlining the process through a true flat tax rate.
On Aug. 5, during the recent special legislative session to address the state’s estimated $200 million budget deficit, Hightower’s “Simplified Flat Tax Act of 2015” (SB43) passed the Senate Finance and Taxation Education committee for the first time. A previous attempt to submit the bill during the 2015 regular session failed, as the bill never made it out of committee.
Hightower, who’s been interested in the idea since reading Steve Forbes’ book “Flat Tax Revolution: Using a Postcard to Abolish the IRS,” said his bill is about making the income tax process simpler for individuals and more enticing to businesses.
“When I ran for office, I started to look at our tax code and noticed that even though we have a marginal rate of 5 percent, most people have a 10-to-25-page return,” Hightower told Lagniappe. “There’s a tremendous frustration with the federal tax code, and I think that’s translated to a frustration at the state level as to why things aren’t more simple, especially when you already have such a low tax rate.”
The bill, which Hightower said he intends to pursue again in a second special session expected soon, would lower the 5 percent personal income tax rate to 3.34 percent and the Alabama corporate income tax rate from 6.5 percent to 4.5 percent beginning 2017.
Because of how education funding is established in Alabama, SB43, if ratified, would also increase individual income tax receipts to the Education Trust Fund by an estimated $9.5 million annually beginning in fiscal year 2018. That part of the bill is emphasized in a fiscal note authored by State Finance Committee Chairman Sen. Trip Pittman.
However, Hightower said his bill isn’t about an increase or a reduction in the amount of money Alabama receives from taxpayers.
“The goal of the legislation is to be revenue neutral while creating a more fair, simple and transparent system,” Hightower said. “It is not a bill to solve the current general fund budget shortfall.”
Hightower told Lagniappe he’s seen support for the bill in the Republican caucus, and also from a few Democrats on the state level. However, other Democrats have criticized the bill for taking taxable deductions away from individuals and leaving existing corporate tax deductions in place.
One particular portion of the bill reads that all “additions to income, deductions, credits, or exemptions for corporations in effect on the date this amendment is ratified may be claimed.”
In contrast, several individual tax deductions like those for Social Security income, federal income taxes, medical insurance premiums and others would be removed. However, Hightower said that working out these difference is part of the legislative process.
Since a version of his bill was first introduced earlier this year, Hightower has amended it to include credits for taxes paid on defined-benefit pension plan income, deductions for mortgage interest, charitable deductions and a higher standard deduction for both individuals and families.
The bill would also double the standard deduction for individuals to $5,000 and establish a new standard deduction on joint returns filed by a married couple at $10,000.
If the bill becomes law, adding new deductions could be more tricky going forward as a provision of the law specifically requires an 80 percent vote of the state legislature to include any additional deductions, exemptions, credits or incentives.
Hightower said his bill is part of his larger plan to “examine” the tax abatements Alabama has aggressively used to entice businesses to the state over the past three decades.
Generally, he said, the bill is about simplifying the process and the deductions removed would be balanced by an increased standard deduction, which would save time, paper and hassle.
According to Hightower, the simplified process would stop tax leakage by making it “so easy to pay your taxes, people and corporations won’t try to get out of it and pay in another state.”
“On average Alabamians spend $300 to file their state taxes, and with this bill they’re saving that because all you do is take your federal adjusted gross income and multiply that by the tax rate,” Hightower said. “Right now we have more of a swiss cheese of a tax code that been created by more than 60 years of serving special interests. I’m trying to take those loopholes away and give us a solid block of cheddar.”
Though the most recent special sessions ended Tuesday with the legislature still failing to produce a budget Gov. Robert Bentley would endorse, Hightower hasn’t yet abandoned his hopes of seeing a “flat tax” come to fruition in Alabama.