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A recent report by the Public Affairs Research Council of Alabama shows that Alabama continues to collect less taxes per capita than nearly any state in the country. PARCA uses data from the U.S. Census Bureau’s Annual Survey of State and Local Finances to compare tax collections between the 50 states yearly. The most recent data comes from the 2022 fiscal year.
When adjusted for population, Alabama is only trailed by Tennessee in tax collections per capita, if the state lottery is not included. All Southeastern states besides Alabama have a lottery, and when the lottery is factored in as revenue, Alabama then ranks last.
Between 2021 and 2022, Alabama collected $4,711 in tax revenue per capita, $474 more than the previous fiscal year. The median value for the states was $6,673 per capita, $1,962 more per resident than Alabama.
For most of the past 30 years, Alabama has consistently ranked last in the Southeast and last in the U.S. in terms of per capita tax collections. In recent years, Alabama has traded that last-place spot with Tennessee.
According to the Census survey Tennessee returned to the bottom spot in the 2022 fiscal year, collecting $4 less per capita than Alabama.
This is driven primarily by Alabama’s tax system and the mix of taxes it chooses to apply.
States primarily lean on three main sources of tax revenue: income, property and sales. Alabama’s per capita property taxes are the lowest in the nation, but sales tax rates are among the highest in the country to account for the gap.
States also apply selective sales taxes for goods to avoid a general tax increase. Alabama currently ranks in the top 15 for per capita collections on alcohol sales, public utilities and motor fuel.
Although Alabama is collecting much less in taxes does not mean that it is due to a lack of burden on its residents.
Low-income workers begin paying taxes at a lower threshold than any other state, requiring families at the poverty level to pay income taxes. In 2022, 16 percent of Alabama residents were living below the federal poverty level. In other states, income tax is used to provide balance for the effects of other taxes, providing credits to low-income households to offset sales taxes, for instance.
At the other end of the spectrum, Alabama is the only state that allows a full deduction for federal income taxes paid, a tax break that benefits high-income earners. Alabama is the only state to allow both individuals and corporations to fully deduct federal income taxes paid when calculating state income taxes, resulting in $818 million less in state income tax collections.
The analysis concludes that the most worthwhile way to grow tax revenues in the state is “to build the health, wealth, and prosperity of the state and its residents.”
“In the long run, Alabama must be able to make sustainable, competitive investments in programs proven to improve health, education, and economic growth. Otherwise, we will end up paying the bills for neglect,” it reads.
