Alabama’s state budget, math, politics, and other mysteries
Alabama finds itself in a budget crisis…again. The fundamentals of Alabama’s budget woes are nothing new. Alabama has two major state budgets, the Education Trust Fund and the General Fund. The Education Trust Fund receives the lion’s share of “growth” revenues such as corporate and individual income taxes and most of the state’s use tax. The General Fund’s largest sources of revenues are the insurance company premium tax, interest on the Alabama Trust Fund and state deposits, and a tax on oil and gas lease and production. As a rule, the General Fund is often in worse shape than the Education Trust Fund because of the General Fund’s limited revenue sources and obligation to fund Medicaid, prisons, and the rest of Alabama’s state government.
Expected outlays for the General Fund are about $250 million more than anticipated revenues in the upcoming fiscal year. Unfortunately, there are only a few ways to deal with it.
The math is rather inflexible and politically inconvenient: Either increase revenues or decrease spending. One option is to increase revenues due to economic growth. The hope is that the state keeps taxes the same but applies those tax rates to a larger tax base which creates more money for the state. It may come as a shock to some, but state politicians have little positive control over economic growth. Business Insider recently ranked Alabama as one of the slowest growing economies in the nation. Growth is one possible option, but it is a wild card at best.
Another alternative is to increase revenue by taxing more activities or increasing tax rates. Legalizing and taxing gambling in Alabama has been discussed as has limiting the deduction for federal income tax payments that Alabamians currently enjoy.
The third option is to focus on spending reductions. The first place to start is a top-to-bottom review of every agency, commission and board to eliminate unnecessary programs and activities. Does Alabama really need to regulate interior designers? Prison reforms that focus on incarcerating the most violent offenders while offering sentencing alternatives to nonviolent offenders could also help Alabama avoid significant future expenditures. Another way to reduce spending in the short-term would involve essentially refinancing the payments owed to the Alabama Trust Fund.
Now consider the politics of each option. Economic growth is the favored solution by a long shot but also the most risky. If the economic expansion does not happen, Alabama might find some one-time money from a settlement or litigation with BP due to the oil spill, but politicians will likely be forced to scramble in an effort to find alternatives.
The second option of new taxes or tax increases is a political non-starter. Governor Bentley has won his last election, and has four years to promote whatever policies he pleases without any real political repercussions. If he proposes removing the federal tax deduction, clearly increasing income taxes in the state, he may not find too many legislators willing to follow. Frankly, that will likely be the case for any tax increase proposal. Even taxing gambling has political consequences for the legislators who would be required to pass the measure.
The third option is possible, but it will require serious efforts by legislators to dive deep beyond budgetary line items and find out whether Alabama’s state programs and offices are both essential and efficient. Arguably the most promising and needed area of reform is within Alabama’s state criminal sentencing and prisons. Unfortunately the only real way to address prison reform and avoid significant new spending is to prioritize who spends time behind bars. For a state where virtually every politician prides being tough on crime, that may be too tall an order. Furthermore, any move to refinance repayments to the Alabama Trust Fund could be seen as putting off fiscal reform to a later date.
The big mystery is not the reality of Alabama’s recurring fiscal crises, but which option Alabama’s political leaders choose to solve the current one.
(Cameron Smith writes a regular column for Alabama Media Group. He is the National Director of the Liberty Foundation of America and is a Senior Fellow with the R Street Institute in Washington, DC. He may be reached at [email protected] or on Twitter @DCameronSmith.)