By Trisha Powell Crain

Alabama lawmakers will wrestle with an unusual problem when the next legislative session starts in March: How to allocate an unexpected $2.7 billion in tax revenue.

That could mean rebates for taxpayers, modest tax cuts, one-time investments in education and programs and possibly a change in the way Alabama funds K-12 education, according to leaders of the House and Senate education budget committees.

Lawmakers will consider proposals to distribute the money during the 2023 legislative session. The $216 million surplus in the state’s general fund will be handled separately, too.

Alabama lawmakers budgeted $7.7 billion for the 2022 fiscal year, which ended Sept. 30. But the state actually took in $10.4 billion, according to figures from the Legislative Fiscal Agency presented at the Alabama Association of School Boards meeting Friday.

When tax receipts are greater than anticipated, lawmakers must redistribute that money during the next legislative session.

Rep. Danny Garrett, R-Trussville, who chairs the House education budget committee, called the surplus a “one time infusion” and “unprecedented.”

“What we have to be careful of,” Garrett said, “is that we don’t use a one-time infusion to make permanent reductions in our revenue stream going forward, and when that event dissipates, we’ll then be short.”

A tax rebate is likely, Garrett said, but how much and who gets it is still up in the air.

“It’s paramount that some portion of that money be shipped back to the people,” Senate education budget chair Arthur Orr, R-Decatur, said.

He recommends returning $400 million to $500 million to taxpayers.

Garrett said he wants lawmakers to consider possible tax cuts, asking, “How can we continue to chip away at tax relief to help small businesses, to help middle income people, help lower income people?”

The state’s Rolling Reserve formula caps budgets based on previous years’ receipts, which meant the impact of $60 billion in federal COVID relief on income and sales taxes, which make up 90% of Education Trust Fund revenue wasn’t factored into the cap.

Both budget chairs said the state’s current school funding formula should be up for debate. The record surplus could be an important resource to bridge any gaps that emerge.

“I think it’s time that we look at how we fund education in the state,” Garrett said, pointing out that Alabama’s Foundation Program – the formula used to allocate money to schools – hasn’t been updated since 1995.

The Foundation Program doesn’t fully take into account additional resources schools need to teach students with challenges like poverty, learning disabilities or those new to learning the English language.

National experts hired to study Alabama’s school funding system in 2013 found it to be both inadequate and inequitable. Not only is the state not providing enough money to schools, but the way the state distributes funding, and its overreliance on local wealth to fund individual school districts via property taxes, is inequitable according to student needs.

The state took no action after the study’s findings were presented in 2015.

Orr pointed to Tennessee’s recent change in its school funding formula to allocate money based on student challenges like learning disabilities or poverty. Tennessee also is committing an additional $1 billion to students and schools.

Orr said there are options this year for low-poverty districts that may receive less money under a student-weighted funding system.

“Using the surplus for this year,” Orr said, “you can equalize and make systems whole that maybe don’t have those [students].”

Orr said he’d like to see a new fund created that could hold excess revenue and be tapped into without restriction. Current rainy day accounts have restricted uses.

Alabama Superintendent Eric Mackey said he agrees with the idea of a tax rebate, but isn’t in favor of across-the-board tax cut that would impact school funding levels.

As to how to divide the rest, Mackey said, “Depending on how much money is left, I would say maybe half of it to one-time expenses like construction and half to recurring expenditures.”

“It’s not surplus, and you can’t think of it that way,” Mackey said. “It’s unanticipated revenue.” And that isn’t playing word games to Mackey, because it emphasizes the question of whether the revenue projection formula enshrined in the Rolling Reserve Act is working.

“It’s already been adjusted once because it kept producing unanticipated revenues,” he said. “Every year they were shooting low and shooting really far too low.”

“I think it might be time to try to look at it again.”

This post was originally published on this site