The bill to repeal the state sales tax on groceries is scheduled for another hearing in the Alabama House — on April Fool’s Day. It’s a popular and fiscally responsible bill. For one thing it would reduce the state’s over-reliance on excise taxes, which are the first to sink whenever the economy does. For another, it would reduce the tax burden on poor citizens, replacing the revenue by closing a loophole for taxpayers in high income tax brackets.
Here’s what H.B. 116 will do:
- Eliminate the 4% state sales tax on groceries. (Local sales taxes are not affected.)
- Prevent local governments from raising revenue by taxing grocery sales only.
- Raise the income tax threshold for a family of four to $20,000 a year (so those who earn less will owe nothing to the state).
- Eliminate an income tax deduction (viz., the state income tax deduction of federal income tax payments) for taxpayers earning more than $200,000 a year, or married couples earning more than $400,000 a year.
- Reduce the same income tax deduction on a sliding scale for taxpayers earning $75,000 to $200,000 a year, or married couples with $125,000 to $400,000.
- Retain the income tax deduction for taxpayers earning less then $75,000 a year, or married couples earning less than $125,000 a year.
The bill will have to be approved in a statewide referendum before taking effect.
The Legislative Fiscal Office calculates that the bill will be “revenue neutral,” neither increasing nor decreasing state revenue. Yet it will reduce taxes for more than 90 percent of state taxpayers.
Alabama and Mississippi are the only two states that tax all grocery sales.
Last time I checked, Alabama was one of only two or three states that allowed a deduction of federal income tax payments from state income tax.
When the bill first came to the floor last week, its defeat was blamed on lawmakers who carry water for the Alabama Farmers Federation (Alfa), the powerful lobby for large absentee landowners. But according to an email on the Alabama Arise mailing list, quieter but no less determined opposition is coming from limited liability companies (LLCs), a type of business that enjoys the limited liability of corporations, plus income tax advantages. For instance, LLC owners have the option of “pass-through” taxation, where income and deductions are reported on owners’ personal income tax returns, but the business itself is not taxed.
So organizing as an LLC can been an easy way to get the legal protection of corporate status while avoiding corporate income tax. Closing the personal income tax loophole might make that strategy less lucrative for wealthy Alabamians with LLCs.
If you live in Alabama, call your representative and tell ’em to support H.B. 116, the Tax Fairness Amendment. To find out who represents you, go to the Alabama House home page and click Find Your Rep in the left-hand column. You can use your ZIP code.