BP settlement doesn’t change need for tax reform

Lurking in the background of the last two or three legislative sessions was the slight hope that the state’s financial problems would find a short-term solution when BP got around to paying up.

A proposed settlement with BP, announced last week, is for a spill that resulted from the April 20, 2010, explosion of the Deepwater Horizon rig, which killed 11 workers. It took three months to cap the rig and stop the flow of oil into the Gulf. The financial consequences for the state and for residents were significant. The damage to the environment was massive, and it is continuing.

The settlement amount may, as the state’s lawyers claim, be adequate compensation for the losses sustained by state government. The General Fund would receive $1 billion over 18 years, with additional funds loosely earmarked for coastal restoration in Mobile and Baldwin counties.

The settlement would mean an additional $55 million per year for the General Fund if it is divided evenly over the 18 years, but it is an open question whether any of the money would be available in fiscal 2016. This amount contrasts to the $200 million shortfall the state faces in fiscal 2016 if it keeps spending at the same level as fiscal 2015, and to the approximately $310 million Gov. Robert Bentley said Friday is needed in order to adequately fund state operations.

The danger is lawmakers will deal with this one-time cash infusion in the same way they have dealt with past windfalls — as an excuse to delay necessary tax reform.

While lawmakers adopt a populist stance when expressing opposition to new taxes, they are protecting the small portion of the population that would be affected by progressive tax reform. Unfortunately, this is the same portion of the population that has the disposable income necessary to dictate legislative action through political contributions.

Lawmakers’ recent history of delaying needed tax reform is what got the state into its current financial mess.

In fiscal 2010 and 2011, the General Fund received windfalls from the federal government, in the form of stimulus funds. In fiscal 2012, the General Fund enjoyed a one-time $266 million windfall as a result of past overpayments of oil and gas royalties to the Alabama Trust Fund.

With no other windfalls in sight, the lawmakers in 2012 convinced voters to allow the General Fund to borrow $435 million, payable in fiscal years 2013, 2014 and 2015.

The fiscal 2016 budget shortfall has been inevitable since at least fiscal 2010.

Rational tax reform would not increase taxes for most Alabamians. Low- and middle-income Alabamians pay more than twice as much of their income in overall state and local taxes as do those with the highest incomes, according to a study by the Institute on Taxation and Economic Policy.

The bottom fifth of Alabamians pay 10.2 percent of their income in state and local taxes, while the middle fifth pay 9.5 percent. The top 1 percent of earners pay 4 percent of their income in state and local taxes.

Alabama’s tax system is unfair to the poor and to the middle class. Commonsense reforms, such as a progressive income tax and elimination of the state-tax deduction for federal income taxes paid, would create a sustainable budget in the long term.

Lawmakers have used one-time windfalls as an excuse for delaying tax reform for too long. They should not do it again with the BP settlement.

(Published July 12, 2015)

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Filed under Alabama politics, Tax reform

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