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Grocery-Tax Break Will Aid Alabama Families

It’s curious how a recession affects different people in different ways. If you and the people you know are still employed, your life may bump along pretty well, except for the depressing reports on your retirement fund. But it’s different if you know skilled workers who still can’t find a job in their field several months after their layoffs – or if you’ve been laid off yourself.
 

Then there are those who feel the ripple effects. Lots of people own small businesses that stall when customers are pinching pennies. Lawn services lose customers, as do plumbers, weekly newspapers and bakeries. Most of these business owners don’t have a big profit margin. The majority make less than $75,000 a year.

 

These people – the ones in the middle – are the ones who will gain most from Alabama Arise’s “untax groceries” plan. The other day I talked to a legislator-businessman who said he hadn’t cleared $50,000 in either of the last two years. He offered that comment after I told him we had tweaked our “untax groceries” plan this year so that all couples making less than $200,000 would get a tax cut. Clearly his family would pay less.

 

So would 96 percent of Alabama families. At a time when middle-income families across the country are struggling to make ends meet, that struggle is even tougher for those of us in the two states – Alabama and Mississippi – that still fully tax groceries. It’s an extra drag on the family budget.

 

For families at high incomes, paying a tax on groceries is like swatting a gnat – merely a nuisance. The same goes for their state income taxes. We searched the state pages at whopays.org, looking for a state income tax that requires a smaller share of income from the highest earners than Alabama’s does. We found two. By contrast, our income tax for a family at the poverty line is the highest in the nation. Simply put, Alabama has an upside-down tax system.

 

One big reason: We give a huge, unusual tax break to the very best-off Alabamians. Alabama is one of the three states that lets them deduct their entire federal income tax on their state returns. The top few Alabamians get far more from this deduction than the entire middle-income workforce combined. Most states spread their income tax breaks evenly across the population.

 

The grocery tax bill sponsored by Rep. John Knight (D-Montgomery) offers voters a swap: Remove the state portion of the tax on everyone’s groceries and require a modest tax increase from the people who continue to be well-compensated even in a tough economy.

 

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This year Knight is keeping the basic structure of his “Tax Fairness Bill,” House Bill 1, but as it goes to committee, it will have a few new features:

 

  • It would remove the 4 percent state portion of the sales tax on both groceries and over-the-counter medicines. (Alabama already exempts prescription medicines.)

 

  • It specifically prohibits local governments from filling the gap by increasing their sales tax on groceries alone. If your city wanted a one-cent increase, that increase would have to apply to everything.

 

  • We’ve calibrated the measure to be a more even swap. As sales taxes drop by $405 million for all Alabamians, income taxes will rise by $407 million for the highest earners. Only 4 percent of income tax filers will pay more. After they deduct their state income taxes on their federal returns, their federal taxes will go down, and their net increase will be about 1 percent of income.

 

  • Couples who make up to $200,000 a year would keep their full deduction for federal income tax. Couples who make more than $300,000 would have no deduction, and those in between would retain a partial deduction.

 

  • The cap for singles would be half that for couples, phasing out between $100,000 and $150,000 a year.

 

So what will happen next year to our legislator who cleared less than $50,000 last year? His income taxes won’t change. For 2011, his family grocery bill will drop by roughly $100 per family member – and the same savings will be enjoyed by his constituents, his employees, his customers. Soon, they may be able to spend a little more money at his business.

 

This scenario will be repeated a million times over. When you multiply each person’s $100 savings by 4 million people, it becomes a $400 million boost to the retail economy in counties across the state.

 

More important, a vote for House Bill 1 is the best way to help families make ends meet in a year when tight state budgets don’t give legislators many opportunities to say yes.

 

Kimble Forrister is the state coordinator of Alabama Arise, a coalition of 150 congregations and organizations that promote public policies to improve the lives of low-income Alabamians.