By MARY SELL, Alabama Daily News
Tax revenues into the Alabama Education Trust Fund were a record $10.4 billion in the fiscal year 2022, which ended last week.
That was 20.54% above fiscal 2021. The state’s General Fund ended 2022 8.4% over 2021.
“These are unprecedented times,” Rep. Danny Garrett, the chair of the House education budget committee, said Monday about the revenue gains that were heavily impacted by federal COVID-19 relief money.
Garrett, R-Trussville, and the other legislative budget chairmen are now bracing for those COVID funds to run out and a downturn in the economy.
An analysis by Moody’s Analytics last month showed Alabama was one of 43 states that have the cash needed to weather an economic slump within the next two years without having to resort to severe spending cuts or tax increases.
The Associated Press last week reported that the economy shrank in the first half of 2022, underscoring fears of a broad-based slowdown that could lead to a recession.
“The bottomline is that we are in fairly good financial shape to weather whatever uncertainties are down the road, but we’re going to continue to have a conservative, prudent mindset,” Garrett said.
The ETF’s largest revenue stream is the state’s income tax, generating nearly $7.2 billion in 2022, a 27.2% increase.
“It’s more people working and it’s higher salaries that employers are having to pay,” Sen. Arthur Orr, R-Decatur, said. In 2019, pre-COVID, the income tax generated $4.5 billion.
Economic slowdowns are first seen in the ETF’s income and sales tax revenues and Orr said he’s watching for an increase in Alabama’s record-low unemployment.
“Unemployment is going to increase as interest rates increase as the Fed tries to cool inflation… Income tax will go down because of that,” Orr, chair of the Senate education budget committee, said.
Orr called the revenue gains in 2022 a “one-time phenomenon” and said in the 2023 legislative session, he will advocate for a tax rebate for working Alabamians and targeted tax cuts for retirees with defined contribution plans such as 401Ks and low-income earners.
“It’s important to send some of this money back to the people,” Orr said on Monday.
In a written statement Monday, Gov. Kay Ivey called the revenues “historic, but completely unsustainable” and a result of reckless federal spending.
She said she and lawmakers would look at ways to get money back to Alabamians.
“I do believe that some form of rebates should be considered, but rest assured that every option we are exploring will be focused on the interests of our citizens and keeping our people first,” Ivey said.
Garrett said lawmakers want Alabama to continue being a low-tax state and could consider a “variety of tax reduction opportunities.”
For fiscal 2023, which started Oct. 1, the state has record $8.2 billion education and $2.7 billion General Fund budgets. Both start the year with higher than expected carryover.
“I think our state has the ability to make significant positive improvements in our educational system, but we’ve got to be very wise about how we allocate these resources,” Orr said.
The General Fund ended the year with receipts totaling $2.77 billion, a $216.2 million increase over 2021.
“It’s a very good year, no question about it,” House General Fund budget committee chairman Rep. Steve Clouse, R-Ozark, said Monday.
The General Fund wasn’t as impacted by federal COVID spending as the ETF, but there is still evidence of increased personal spending, Clouse said. The state’s lodging tax revenue was up more than 22% to $77.3 million and the online sales tax flow to the General Fund was up more than 20% to $232.8 million.
Clouse said budget leaders had expected to start fiscal 2023 with a balance of $160 million in the General Fund but have instead about $360 million.
“We’re in as good a shape as we’ve ever been, but there are storm clouds brewing,” Clouse said.
Those clouds include a downturn in the economy and increased expenses at some state agencies, including Medicaid, corrections and mental health.
A potential increase to Medicaid spending in 2023 concerns Sen. Greg Albritton, R-Range.
In early 2020, in response to COVID-19, the federal government increased states’ Medicaid funding, but said people already enrolled or enrolled during the pandemic couldn’t be removed. That order has been extended multiple times and now could end sometime in early calendar 2023.
The increased federal funding will end, but the process of evaluating more than 1 million Medicaid enrollees for possible continued coverage will not be immediate, Albritton said.
“Our expenses are going to remain substantially higher, and the money (the federal government) has been paying will be reduced,” Albritton said. “That’s going to be a huge hit.”