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Alabama Governor Proposes Sales Tax Increase to Balance Budget!

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In his 2015 "State of the State" address delivered on March 3, Alabama Governor Robert Bentley delivered a rather somber outlook for Alabama governmental fiscal position for the near future.  The state is facing a $700 million budget shortfall driven by increased healthcare costs for employees and for citizens who participate in the various state supported healthcare programs and by growing demands for educational programs.  The Governor noted that Alabama has the most overcrowded prison system in the U.S. and that significant changes need to be made to expand those facilities.  The Governor also outlined that there is a $264 million shortfall in the General Fund and Education Budgets.

The Governor's speech mentioned that two-thirds of corporation operating in Alabama paid zero income tax and that of the 3,000 Fortune 500 corporate tax returns filed in Alabama, 58% had no income tax reported.

To plug this hole, the Governor has outlined several tax changes that are expected to bring in $541 million.  The Governor mentioned that he had an eight (8) point plan for tax increases.  Here are five of the items proposed by the Governor:

  • Raising cigarette tax by 82.5 cents per pack,
  • Double sales tax on automobile sales from 2% to 4%.
  • End municipal exemption for public utility license tax,
  • Increase rental car tax from 1.5% to 4.0%, and
  • Implement combined reporting for corporations that do business in the state.

It should be noted that many other states that relied on increased cigarette tax revenue to balance budgets have been disappointed by the revenue produced.  The increased price tends to be an incentive to quit smoking and also produces an incentive for cigarette smuggling and other illegal activities that dodge all state taxes.

These proposals must all be approved by the Alabama Legislature so the final outcome is very uncertain.

Ned Lenhart, CPA is the founder and President of Interstate Tax Strategies, P.C. (“ITS”). Ned has over 28 years of varied state tax consulting experience including roles as the Director of Compliance for the Missouri Department of Revenue, SALT Manager for Arthur Andersen in Kansas City, and Director with Deloitte in their Atlanta office from 1994 to 2003. He started ITS in 2003 to assist local and national companies by helping them develop proactive strategies to managing their multi-state sales tax obligations.

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