Without reform, Alabama will continue to lag

“An overwhelming majority of economists believe that without pension reform, Alabama will be forced to resort to austere budgets, federal bailouts and/or default.”

That was the message Dr. Daniel J. Smith brought to those attending the Republican Women of Coffee County meeting Wednesday, May 18.

Smith, associate professor of economics at Troy University and the associate director of the Manuel H. Johnson Center for Political Economy at TU, shared his thoughts on the state of the state’s economy.

“Why does Alabama rank poorly in economic freedom? One word,” Smith said. “Overspending.” With adjustment for population and inflation, Alabama has overspent by 21 percent since 1999, Smith said. “State spending, per person, is substantially higher than our neighbors.”

The large number of government employees in Alabama is part of the problem, Smith said. Alabama has 20.3 government workers per every 100 private sector workers, Florida has 14.3. Georgia has 17.2 government workers per every 100 private sector workers, Tennessee has 16 and Texas has 16.9.

“Not only is our public employment high, our public employment compensation is also high,” Smith said. “We pay our public sector workers 11 to 20 percent more than our private sector counterparts. Not any other state in the region has that high a public sector compensation compared to their private sector.”

Smith said mandatory enrollment in the state pension system has created “an area of reform that we cannot ignore. Without fundamental reform, Alabama will continue to fall further behind. “One of the primary reasons for Alabama’s lackluster growth is its showing in the rankings for economic freedom,” Smith said. “The Economic Freedom of North America Index ranks the states by their economic freedom. While Alabama ranks in the middle of the pack, our neighbors rank much higher. Just a one-unit increase in economic freedom on that scale results in nearly 80,000 new jobs.”

Alabama’s per person tax revenues may be the lowest in the nation, but Alabama’s tax rates are not the lowest in the nation, Smith said. Alabama’s 4 percent tax rate makes it the 31st highest in the nation, tied with Mississippi, New Hampshire and Utah.

That rate is also higher than Florida, Tennessee, and Texas which all have no income taxes.

Alabama’s 6.5 percent corporate tax rate makes it the 26th highest in the nation. Florida, Georgia, Mississippi, South Carolina and Texas all have more competitive corporate tax rates, Smith said.

Alabama’s state and local sales taxes make it the fourth highest in the nation. “In fact, there are only a few things taxed in Alabama that have what can be considered, comparatively, a low tax rate,” Smith said citing property, gasoline and cigarettes.

Income per person in Alabama was ranked 44th in the nation at $37,512. “That's $2,800 below the regional average,” Smith said. “That means Alabamians earn $11,0 00 less for a family of four than the regional average.”

The Gross Domestic Product is one of the primary indicators used to gauge the health of a country's economy, Smith explained. It represents the total dollar value of all goods and services produced over a specific time period; you can think of it as the size of the economy.

“The 2014 GDP growth rate in Alabama was just .7 percent,” Smith said. “Texas had 5.2 percent growth, Florida had 2.7, Georgia had 2.3 and Tennessee had 1.7 percent growth rate.

“If these growth rates persist, it will take Alabama nearly 103 years to double the size of its GDP, it will take Texas only 13.8 years, Florida only 26.6 years, Georgia 31.3 years and Tennessee 42.4 years.

“Whenever I discuss Alabama politics, it always turns to taxes as if we have a tax problem,” Smith said. “We have a spending problem. Alabama has the lowest taxes per capita in the nation.

Yes, our tax revenues are low but that is primarily because our high tax rates discourage economic activity and personal business migration to Alabama.

“There are no magic bullet solutions; we simply need to roll up our sleeves and cut government spending and implement measures to insure that government spending doesn’t spiral out of control again,” Smith said, citing K-12 education reform, more privatizing, state pension reform, criminal justice reform, Medicaid reform, elimination of economic incentive programs and increasing political transparency and accountability.

“However, the most important thing I’m going to tell you today,” Smith said, “is that no constitutional change, limitation or restriction and no reforms are ever going to constrain a democratic majority that is bent on supporting ‘tax and spend’ policies and ‘tax and spend’ politicians.

“To truly restrain the growth of government, we need to expose our (college) students to the ideas that our nation was founded upon, the ideas of limited government and economic freedom,” Smith said. “These ideas have brought unprecedented wealth and prosperity around the globe when they have been implemented.