Friday, December 10, 2010

Gary Palmer: Extending tax cuts would make Christmas merrier for Alabama

  Alabamians and the state of Alabama have a lot on the line in the ongoing debate in Congress over extending the Bush-era tax cuts.

  On December 7th, President Obama agreed to support extending all the Bush tax cuts for taxpayers for another two years. Originally, Obama and the Democrat leadership in Congress were determined to raise taxes on everyone with a yearly income above $250,000. They tried to cast wealthy families as rapacious and selfish in their latest attempt to “spread the wealth around.”

  Casting higher-income Americans as the enemy of everyone else did not resonate with a majority of Americans as the polls indicated that most Americans do not support the liberal idea of soaking the rich. That is probably because most Americans know that higher taxes on anyone will not solve our fiscal problems. And they are positive that raising taxes on small business owners and others who supply the capital finances that our economy depends on will only make the economic crisis worse. Even some liberal policy analysts support extending all the Bush tax cuts. As they have said, raising taxes in a weak economy is a bad idea.

  It would be particularly bad for the Alabama economy. According to a report by The Heritage Foundation, if Congress fails to extend the Bush tax cuts, Alabama would lose an average of 9,873 jobs per year, peaking at almost 12,500 jobs by 2016. The average household income in Alabama would go down by $3,498 per year and overall, individual income taxes would go up by $5.3 billion, according to The Heritage Foundation report.

  Curtis Stewart, the Director of Tax Policy and Research for the Alabama Department of Revenue, projects that Alabamians would be hit with an increase substantially less than that projected by The Heritage Foundation. Stewart said, “Alabamians can expect to pay approximately $3 billion more in federal income taxes per year if neither the tax cuts enacted in 2001 and 2003 are renewed, nor the annual ‘patch’ to the Alternative Minimum Tax is enacted.” Because all Alabama taxpayers get a deduction for their federal income taxes, the combined effect would result in a loss of $154 million from revenues for the Education Trust Fund, making Alabama’s already critical fiscal condition even worse. If The Heritage Foundation projection is correct, the loss in state income tax revenue could be over $250 million.

  That loss would not only affect Alabama’s income tax revenues as state and local sales tax revenues would also take a big hit. Taking another $3-5 billion out of Alabama’s economy could reduce state sales tax revenue by $100-200 million and reduce sales tax revenues for cities and counties by another $150-250 million. Add projected job losses and it is easy to see that the failure of Congress to extend the Bush tax cuts would have a devastating impact on the state of Alabama.

  Obviously, the taxpayers of Alabama along with the state of Alabama have a lot to lose if the tax cuts are not extended. However, if they are extended, there is a lot to gain.

  Extending the Bush tax cuts will prevent the federal government from taking more money out of taxpayers’ pockets but the extension alone will not put more money in. Consequently, extending the tax cuts alone will only marginally stimulate the economy.

  However, extending the Bush tax cuts is not the only proposal in the deal. There are two other significant proposals agreed upon by Obama and the Republicans. The Obama administration added a provision that will allow businesses to fully deduct all investment expenses. In addition, the Social Security tax paid by individuals will be reduced by 2 percent, for 2011 only.

  The investment expense deduction should help motivate investments in businesses which in turn should produce more jobs for the economy. Reducing the Social Security tax deducted from individual paychecks should result in more spending and economic activity. It would also add to state and local revenue.

  According to a preliminary estimate from a state official, cutting two percent from the Social Security tax would result in a substantial increase in Alabama’s income tax revenue. Reducing Alabamians’ Social Security payroll deduction from 6.2 percent to 4.2 percent would be worth about $1.4 billion. That is $1.4 billion that would not be deducted from state income tax returns which should increase state income tax revenue in the range of $50-$70 million. The fact that the Social Security payroll deduction is on a per-paycheck basis makes it likely that the majority of the $1.4 billion will be spent. This could add over $50 million in state sales tax revenue and about $70 million to city and county sales tax revenues.

  The bottom line… if Congress passes the plan agreed upon by Obama and the Republicans, it will be a much merrier Christmas for the state of Alabama and Alabama taxpayers.

  About the author: Gary Palmer is president of the Alabama Policy Institute, a non-partisan, non-profit research and education organization dedicated to the preservation of free markets, limited government and strong families, which are indispensable to a prosperous society.

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