TO: Select Clients & Friends
DATE: May 28, 2003
RE: State Tax Update: Summary of the Governor's Proposed Tax Legislation
As most of you are aware, Governor Bob Riley has proposed tax legislation that will produce sweeping tax reform in Alabama. If and when this legislation passes through the legislature and is signed by Governor Riley, the entire package will be put to a vote of the populous for ratification in early September 2003.
For your reference, the following is a summary of Governor Riley's proposed tax legislation grouped by type of tax.
1. Reduces the deduction for federal incomes taxes in tax year 2003 for individuals from 100% to 75%. In tax year 2004 and beyond, the deduction is eliminated.
2. Reduces the deduction for federal income taxes for corporations in tax year 2003 to 75% of the amount paid or accrued. In tax year 2004 and beyond, the deduction is limited to 25%.
3. Reduces the deduction for federal income taxes for financial institutions in tax years 2003 and beyond to 25% of the amount paid or accrued.
4. Beginning in tax year 2004, eliminates all itemized deductions for individuals except for home mortgage interest, medical expenses and charitable contributions.
5. Consolidates certain charitable and nonpolitical income tax check-off recipients into one Code section.
6. Decouples Alabama income tax law from federal income tax law, with the Legislature having to affirmatively review and adopt subsequent changes to federal income tax law.
7. Changes the tax rate and limit structure as reflected in the following table:
Single Individual or Married Filing Separate Return $0-$500, 2%
$>3000, 5% $0-$75,000, 5%
Head of Household $0-$500, 2%
$>3000, 5% $0-$112,500, 5%
Married Filing Joint Return $0-$1000, 2%
$>6000, 5% $0-$150,000, 5%
Trusts or estates 5% $0-$9,500, 5%
8. Provides that the calculation of Alabama income is made by starting with federal adjusted gross income and making certain specific adjustments.
9. The standard deduction is increased.
10. The personal and dependent exemptions are increased.
11. Provides that the calculation of Alabama net income of trust and estates and the amount of a beneficiary share is made in accordance with the Internal Revenue Code for years after December 31, 2003.
12. Taxes resident trusts on all income received.
13. Taxes nonresident trusts on all income allocated and apportioned to Alabama.
14. Exempts homeowners associations, political organizations, and farmers' cooperatives from income tax.
15. Eliminates the use of a short form for the filing of income taxes under the Multistate Tax Compact.
16. Allows credits against income tax for amounts provided to an approved company for tax credits, job development fees and other incentives or for a payment by such company into a tax increment fund.
17. Provides for various changes to further conform Alabama tax law to federal tax law.
1. Lowers the maximum state ad valorem tax from .65% to .35%.
2. Increases the assessment percentage of property for state tax purposes to 100% of value over a four-year period.
3. Increases the homestead exemption to $50,000 for state tax purposes over a four-year period.
4. Raises the homestead exemption from 160 acres to 200 acres.
5. Creates a new farmstead exemption.
6. Provides that beginning October 1, 2003, for local property tax purposes, most business property will be assessed at 22% of its value instead of 20% of its value.
7. Provides that public utility property will be assessed at 30% of its fair market value as of October 1, 2001, until the year in which the assessed value of the property at 22% of value as of the current year exceeds the assessed value at 30% of value as of October 1, 2001. Once the assessed value at 22% exceeds the assessed value at 30%, the property will be assessed at 100% of fair market value for state taxes and 22% of fair market value for local taxes.
8. Allows local property tax increases without approval of the legislature.
1. Eliminates the current $.04 and $.02 per gallon excise tax on lubricating oil and makes it subject to the state sales and use taxes.
2. Increases the rental and leasing tax on automotive vehicles from 1.5% to 3%.
3. Increases sales and use taxes on automotive vehicles from 2% to 2.5%.
4. Increases the sales tax on vending machines from 3% to 4%.
5. Levies a 4% sales and use tax on most services connected with tangible property if the tangible property is also subject to sales tax.
6. Increases the casual sales and use tax on automotive vehicles and motorboats from 2% to 2.5%.
Business Privilege Tax
1. For insurance companies, provides that the credit for business privilege taxes paid is reduced from 60% to 30%.
2. For financial institutions, provides that the maximum cap for the business privilege tax is reduced from $3,000,000 to $15,000.
3. Conforms the business privilege tax forms, filing dates and filing extension to the corporate income tax laws.
4. Eliminates the deduction of 30% of taxable income from net worth for Alabama S corporations, limited liability companies and disregarded entities.
1. Increases the mill rate for cigarette taxes from 8.25 to 15.5%.
2. Increase the rates of the utilities gross receipts tax and of the utility service use tax.
3. Repeals the public utility license tax.
4. Increases the deed recording tax and mortgage recording tax.
5. Provides that for property and casualty insurers, the P&C premium tax rate credits allowed for "economic development activities" cannot lower the insurance premium tax rate below 2%.
6. Provides that for insurance companies, the examination expense credit is eliminated.
7. Removes language on financial institutions concerning the taxation of related party debts and ownership of capital stock in related companies.
8. Creates a new ad valorem tax on intangible property of $1 per $1,000 of fair market value, not to exceed $5,000 per individual per year. Each taxpayer would be allowed a $100,000 exemption. The tax would not apply to debt obligations of the United States or State of Alabama or its political subdivisions, interests in retirement plans, obligations of an employer to an employee for services rendered, cash or cash equivalents, interests in charitable remainder trusts, interests in an estate or trust, life insurance or annuity policies, and interests in qualified tuition plans.
9. Eliminates the credits allowed to be taken against the financial institutions excise tax (which is primarily sales tax paid by the financial institution).
10. Creates the Alabama Excellence Initiative Fund, which the Legislature will annually appropriate.
11. In order to implement the legislation, various constitutional provisions are repealed and/or amended.
Rebecca Wright Pritchett
Attorney at Law
Sirote & Permutt, P.C.
Post Office Box 55727
Birmingham, Alabama 35255-5727
Phone (205) 930-5140
Fax (205) 930-5101