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With record ETF, Alabama leaders are considering tax rebates

By MARY SELL, Alabama Daily News

The state is set to have record and excess tax revenue in the Education Trust Fund when the 2022 fiscal year ends in late September and leaders are discussing potential uses for the unspent funds.

An income tax rebate is an option, the chairman of the Senate education budget committee told Alabama Daily News.

“I strongly believe tax rebates to send money back to the people of Alabama from Montgomery should be a very high priority,” Sen. Arthur Orr, R-Decatur, said.

Orr said the amount could total several hundred million dollars. After a rebate, targeted tax cuts for some retirees with defined contribution plans and middle-income families with young children may be an option. Orr also said there’s interest in increasing the tax benefits for families that adopt children.

“With this windfall, we need to seriously look at sending money back to the people,” Orr said.

As of the end of July, with two months remaining in the fiscal year, the ETF had $9.7 billion in available funds. Its total obligations for the year are about $9 billion.

“That means you need nothing for the two remaining months of the budget year, you’ve already met the budget,” Kirk Fulford told a panel of lawmakers last week. Fulford is deputy director of the Legislative Services Agency’s Fiscal Division.

How did we get here? Lawmakers have been conservative with their spending since the onset of the pandemic, not spending in 2021 or 2022 all available funds. Meanwhile, the state’s budgets, especially the ETF, has benefited from federal infusions of cash. Record unemployment and increased income tax receipts have also helped.

Fulford has warned lawmakers repeatedly in recent months that the state and nation is living off of a “sugar high” from federal pandemic relief funds that pumped billions into the state’s economy.

The education budget’s July revenue was up 10.17% over July 2022. Year-to-date, the fund is nearly 22%, or $1.5 billion, more than at the same time in 2021.

“That’s so astronomically above what the average growth for the Education Trust Fund receipts, regardless of which time period you’re looking at…” Fulford told lawmakers.

Orr said the rebate and tax cut discussions depend greatly on future events: The November elections and who’s sent to Montgomery to make decisions and the state’s and nation’s economic situation in March 2023, when legislators, including dozens who are newly elected, meet for the regular session.

If people are working and spending money and the ETF is strong, Orr said a rebate should be high on lawmakers’ list of things to do. Orr and Rep. Lynn Greer, R-Rogersville, sponsored this year two successful bills with tax cuts for retirees with 401Ks and IRAs and middle-class families. 

Gina Maiola, Gov. Kay Ivey’s spokeswoman, said the governor is pleased with the state’s economic situation, for which she credits smart decisions in Montgomery and hard-working citizens. 

“Right now, Alabamians and Americans alike are feeling the pinch, though, and Gov. Ivey wants to be able to help Alabamians in whatever ways we can,” Maiola said. “She has directed Finance Director Bill Poole and his team to take a deep dive to explore our options to provide relief and to work with Legislative leadership and other stakeholders in this regard.”

Lt. Gov. Will Ainsworth, when speaking to the ALGOP in Montgomery on Saturday, also mentioned tax cuts as a priority when lawmakers gavel in next year.

The ETF’s largest revenue streams are sales and income taxes. They are also bellwethers of the larger economy.

“If there is a slowdown in the economy, the Education Trust Fund receipts will respond directly and quickly to that slowdown,” Fulford said. “People have less money to spend, sales taxes are affected. Less people are working, income taxes are affected.” 

Lawmakers will likely continue to be cautious. Rep. Danny Garrett, R-Trussville, chairman of the House education budget committee, said there are a lot of possibilities for the excess revenue, but there’s also a lot of uncertainty.

“We may end up with a large beginning balance (in the next fiscal year), but then we may have an economy that falls off a cliff,” Garrett told Alabama Daily News. “There’s a lot of time between now and March.” 

The General Fund and SSUT

Outside of the education budget, the General Fund, which supports non-education state functions, is also up this year by about 7.41% or $250 million to $2.1 billion. That’s a higher growth rate than recent years, Fulford told lawmakers.

House General Fund budget committee chairman Rep. Steve Clouse, R-Ozark, said any carryover from this fiscal year to the next could be allocated in one-time appropriations.

“There’s a whole array of issues that we can take advantage of this extra money for, particularly dealing with Medicaid, prisons and mental health,” Clouse said.

Fulford continues to point to the Simplified Sellers Use Tax on online retailers that became mandatory in early 2019 as an MVP for the General Fund and ETF. It’s up 20% this year, which is obviously good. But last year, it grew by 40%.

“(The SSUT is)  one that I continue to watch because as inflation continues to play out in the economy, that’s going to be an indication of what the long-term impact will be on the General Fund,” Fulford said. 

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