Legislation on “fair taxation” would replace income tax, sales tax by consumption tax

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Alabama Representative Mike Holmes R-Wetumpka has pre-tabled “fair taxation” legislation for the 2020 regular session that replaces state income and sales taxes with a tax to statewide consumption.

The legislation, called the Alabama Economic Freedom Act, would create a flat 8.03% tax on all purchases of goods and services in the state. The tax is designed to generate the same amount of revenue for the state as the traditional income and sales tax system.

An automatic refund given at the beginning of the month, called a “prepayment”, would offset the price of the tax for Alabama citizens living at or below the poverty line to avoid causing unreasonable economic harm to residents. low income.

The income tax division of the Alabama Department of Revenue would become obsolete and the collection of consumption tax would be redirected to the sales tax division.

Holmes said the current system selects winners and losers through a “endless maze of tax exemptions, deductions and credits ”in a statement. The system proposed in the legislation is simple and understandable, he said.

How a fair tax works

The proposals for improving the current tax system are varied and numerous.

Legislation pre-tabled by Holmes characterizes the fair tax plan; its drafting was based on the Fair Tax Act, a bill that has been introduced in Washington in every session since 1999.

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The federal version of the plan would eliminate income tax altogether, but Holmes’ state-level plan would eliminate corporate and state income taxes as well as the repeal of state, county and county. the munational sales taxes. The plan would replace those taxes with a statewide consumption-based tax – a consumption tax – at 8.03%, levied at the point of sale on all goods and services purchased in the state. Intermediate sales between businesses would not be taxed, as would used goods or spending on savings, investment or education.

The plan is also supposed to be revenue neutral, meaning that – if all went according to plan – the consumption tax would generate the same amount of revenue for the state as the traditional system of income tax and income tax. sales.

The elimination of income tax and sales tax, which together 86 percent of state revenue, would leave a gaping hole in the budget to be filled by the consumption tax. In fact, research from the Beacon Hill Institute has predicted that to be revenue neutral in 2019, the consumption tax would need to bring in $ 12.28 billion. How would the tax system in this bill bring in all this money?

By taxing more of the things you buy. At first, the consumption tax may seem like a normal sales tax. But the plan wouldn’t be revenue neutral if it just instituted an 8% statewide sales tax. Thus, consumption tax would be levied on almost all purchases, including previous purchases exempt from sales tax: gasoline, new homes, services like plumbing or freelance writing, etc. In 2017, purchases in Alabama subject to consumption tax totaled 84.2% of total gross domestic product, according to the Beacon Hill Institute study. Using a bit of algebra, they found that the tax rate would have to be 8.03% to raise $ 12.28 billion.

As the state collects consumption tax, a portion of these funds would have to be redistributed to counties and cities whose sales taxes would be repealed under the law. Of the share of funds allocated to counties and cities, 60 percent would go to cities and 40 percent to counties, broken down by population.

A provision in the law ensures that low-income citizens of Alabama would not fall victim to the tax.

An automatic rebate, called an “early rebate”, would be available to all legal residents of the United States and Alabama to offset the cost of the consumption tax. For all legal households, a check would be mailed at the start of the month for 8.03 percent of what the Department of Health and Human Services considers the poverty level of monthly wages for family size. Household. This amount is what the household would have to pay in consumption tax, if it consumed goods and services at the federal poverty line. Under this proposed system, low-income Alabamians would be exempt from taxes on purchases, unlike the current tax system.

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So if, on average, each Alabama would always pay the same amount of taxes, what would be the positive effects of the coming into force of the Alabama Economic Freedom Act? Alabama director of Americans for Free Taxation Chuck Bailey, who helped draft the legislation, spoke with the Alabama political reporter Monday to offer a preview.

Regarding the impact of eliminating taxes on intermediate sales and corporate income, Bailey said, “Why not just prevent all these taxes from piling up from company to company as it goes? as the product is produced or the service is provided, and simply place it where it is really meant to be: when does the individual buy it for personal use? Proponents of fair taxation hope that removing these corporate taxes would lower the price of goods and services to consumers.

Bailey is one of a group of activists vying for fair taxation to gain new national momentum. To do this, he said, this is why the plan was brought to the state level; If the plan is successfully implemented, for example in Alabama or Georgia, politicians will feel more comfortable with the Fair Tax Act, he hopes.

Bailey also highlighted how much tourists will be able to contribute to the Alabama tax base.

One possible escape route is the ability for Alabama residents who live near the state border to travel to the nearest state to purchase their groceries, gasoline or otherwise, and d ” be essentially exempt from paying the state consumption tax. No supporter of the law has had the opportunity to comment Alabama political reporter, Nevertheless.

The law would also obsolete the Income Tax Division of the Alabama Department of Revenue. The sales tax division would now be redirected to collect consumption tax.

The Legislative Assembly will meet again in February.

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Correction of July 23: A previous version of this article incorrectly stated that prebate was only available to households at or below the poverty line. The prebate is based on family size, not income. We regret this error.


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