Special Session Ends Without Budget Passage

The Alabama Legislature adjourned the year’s first special session on Tuesday. Though it was called for the purpose of adopting next year’s General Fund budget, the special session ended without a budget passing the Legislature. As a result, Gov. Bentley will be forced to call a second special session in time for a General Fund budget to be in place by Oct. 1, the start of fiscal year 2016. There are some indications that the governor plans to call the session mid-September, and will use the interim to put pressure on enough legislators to pass nearly $300 million in selected tax increases.

The Legislature met for eight legislative days over 30 calendar days. While no consensus could be reached on a funding solution for the General Fund, numerous ideas were discussed among representatives and senators, including transferring use tax receipts from the Education Trust Fund to the General Fund, increasing cigarette taxes by 25 cents per pack, and raising the maximum annual cap on the Business Privilege Tax. In all, 118 bills were introduced in the House and Senate (59 in each chamber). In the end, two local constitutional amendments, four local bills, and eight general bills passed the Legislature. All of the local and general bills currently await the governor’s signature, but it is too soon to know which of them will actually become law. Two of these bills deserve particular attention.

First, HB42 by Rep. Ken Johnson (R-Moulton) repeals the total withholding exemption that had previously been granted to certain income taxpayers. Prior to this bill, individual taxpayers had the option of having no income taxes withheld from their paycheck if they certified to their employer that they did not anticipate an income tax liability for the current year. In response to suspected abuse, HB42 eliminates this option altogether. Effective Sept. 1, all individual taxpayers must have taxes withheld from their paychecks, and taxes withheld will be available to be refunded through the traditional process if, at the end of the year, the amounts withheld exceed the taxpayer’s income tax liability. Second, HB49 by Rep. Rod Scott (D-Birmingham) establishes a “factor presence” nexus standard for the purposes of income taxation. Per the bill, effective Jan. 1, 2016, the in-state property, payroll, or sales of a business organized outside of Alabama may be subject to Alabama’s tax laws if the in-state property, payroll, or sales exceeds certain monetary thresholds. This bill makes Alabama the 7th state with a “factor presence” nexus standard.

As was the case in the regular session, the association deployed a majority of its resources during the special session toward killing or amending legislation that could have negatively impacted the banking industry. For example, SB51 by Sen. Trip Pittman (R-Montrose) would have adopted the “combined reporting” method of filing state income taxes, while SB43 by Sen. Bill Hightower (R-Mobile) would have placed a “Flat Tax” constitutional amendment on a statewide ballot next March. Both of these measures could have had significant negative consequences to a bank’s tax liability, and were thus met with our strongest opposition. Neither of them made it to Gov. Bentley’s desk.

As the next special session approaches, the association will remain engaged in productive discussions on tax reform proposals. It may be that we need your help to persuade your elected officials to consider alternative options that don’t damage the state’s banking industry. We always appreciate your assistance in these matters, as there is no substitute for an elected official hearing from his or her constituent.