Will new taxes slow Alabama’s economy?

From what I call tell, Gov. Bentley has pretty much said he is going to call for higher taxes to fix the shortfall in the General Fund. How will this impact the state economy?

The answer is simple: unless Goat Hill can generate a higher return with the money than the private sector, any increase in taxes shouldn’t be good for the state’s economy. So, do you think our state government is more effective with your money than you are?

With that said, there are going to be plenty of naysayers and complainers when the Governor finally announces his tax plan. Heck, there already are, and, unless I am looking in the wrong places, no one even knows what any tax increases will be. That hasn’t stopped people from getting into a lather just the same.

While I don’t know all the ins and outs of the budgetary process, and I certainly haven’t audited the books, I do know the discretionary portion of the state budget isn’t all that big. It seems every tax is earmarked for something. I also know government budgets generally tend to do OK when the local economy is robust.

So, since we can’t seem to balance the general fund without borrowing more money or shifting funds from one pot to another, you can reasonably intuit things aren’t as red hot as we would like. If they were, Montgomery would be bringing in more money, and we wouldn’t have to be talking about higher taxes.

Using constant 2009 dollars, the Alabama economy was $175.037 billion in 2008. It was $180.727 billion in 2013. That is a 0.6 percent annualized rate of return over that five-year period. Conversely, the U.S. economy, as a whole, grew at a 1.2 percent annual clip over that time frame. For the three-year period ending in 2013, Alabama grew at a 1.5 percent yearly clip, compared to the national average of 2.0 percent.

Whose fault is that? After all, it has to be someone’s fault, right? We could discuss this or that policy until the cows come home, and probably agree to disagree on most of them.

State economies aren’t really any different than businesses. Do they compete on product or price? Or are they sort of stuck in middle? Do they keep doing the same thing over and over, but expect a different result each time? What is their brand, and how strong is it?

As you know, good business models and strong brands are often decades in the making. They don’t just happen overnight, even if it sometimes feels that way. Simply put, there are very few business success stories which didn’t require a lot of effort, a lot of time, and a lot of thinking outside of the proverbial box.

Why should state economies be any different? This budget problem wasn’t a year or two in the making. Neither was our recent below-average economic performance. These things take time, and to correct them will take a lot of those same things which make businesses successful.

However, budget crunches don’t have the luxury of time. Are higher taxes the solution? Probably not.

In the end, let me leave you with this. In 2013, after expenses, Kentucky made $225.9 million on its lottery system. Louisiana made $160.5 million, and South Carolina came home with $301.9 million. If Alabama wants to come up with money, fast, it might need to start thinking outside its comfort zone.

Hey, businesses would do it.

John Norris is a Managing Director, and the Head of Wealth Management at Oakworth Capital Bank in Birmingham. He can be reached at john.norris@oakworthcapital.com.