Alabama Aims to Shield Tax Incentives from Legal Challenges

February 29, 2012

The Alabama House of Representatives is considering two new bills that combined would grant the governor power to create business development tax incentives in the state and then shield those decisions from the court's oversight.

HB 160 allows the governor to initiate a large tax incentive at the suggestion of the Alabama Development Office and the Department of Revenue. Tax Analysts' David Brunori points out the bill "would allow the governor 'at his or her discretion' to let a company keep from 50 to 90 percent (again at the governor's discretion) of the state income tax withheld from workers."

Meanwhile, HB 159 would amend the state constitution such that, "notwithstanding any other provision of this Constitution, the provisions of House Bill 160... shall be immune from any challenge based on either this Constitution or any other law of the State of Alabama." By granting tax incentives immunity a regime is created where the decisions of the governor and Alabama's tax administrators are protected from legal, political, economic, and popular scrutiny. Furthermore, their choices will fall outside the jurisdiction of the time-honored tradition of checks and balances.

The impetus for the amendment comes from a history of challenges to tax incentives in Alabama. Last September, former Alabama education officials brought a lawsuit against the governor and other state officials over three business tax credit bills. They argued that the bills take away funds from the Education Trust Fund revenue, and that the bills unlawfully started in the Senate, which does not have the power to start revenue measures.

In the late 1990s small insurance companies sued the state, claiming that tax incentives aimed at property and casualty insurance were being awarded in a fashion that favored large companies. Eight insurance companies contended that tax credits were discriminatory because it was easier for larger companies with more offices and employees to take advantage of the credit. While the case ultimately failed, it did reach the state Supreme Court and put pressure on legislators to end tax credits.

It is no surprise that Alabama legislators are taking such drastic extremes to protect tax incentives in fear of a repeat of history. Despite the growing number of economists that argue against tax incentives, Alabama legislators continue to provide new and increasingly generous tax incentives in futile attempts to spur growth.

By breaking the principles of neutrality and simplicity the two bills will do little to promote strong business competitiveness within the state. The aims of the promoting economic growth are not best served by the state providing tax incentives to develop through the recruitment, retention, and expansion of arbitrarily designated "quality projects" within the state, but through keeping rates low and broad for all businesses to operate under.

More on tax credits here.

More on Alabama here.

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