The Johnson Center is proud to announce Improving Lives in Alabama: A Vision for Economic Freedom and Prosperity. This comprehensive study examines current policy approaches to some of the most important issues facing Alabama to identify policies that help build a better Alabama for generations to come.
The study’s 12 chapters document the research findings and important policy lessons drawn from in-depth studies on topics including tax and healthcare policy, labor and legal regulations, as well as pension, education and economic development policies. These issues have a significant impact on the health of Alabama’s economy and the well-being of its citizens now, and in the future.
Getting Alabama’s economic policies right is crucial to improving the lives of Alabamians. This study compilation aims to put Alabama on a path for growth, and greater prosperity and opportunity.
The study recommends both immediate policy initiatives, and offers long-term policy goals to increase freedom and prosperity in Alabama.
- Economic freedom and individual liberty are not only fundamental human rights, but play a crucial role in economic growth, well-being, opportunity and prosperity; and are the foundations of a strong economy built to last.
- Competition leads to a strong, growing economy that offers individuals greater opportunities and can lower the cost and improve the quality of government provided services.
- Regulations and licenses impede business formation and growth, pose barriers to individuals to enter the workforce and to career mobility, and raise costs on consumers.
- High levels of state spending and a complicated web of state agencies raise the costs of doing business in our state and make it difficult to attract new businesses to Alabama.
- Failing schools and a failing health system are unfair to our children and to all Alabamians. Furthermore, it compromises our labor force and, again, makes Alabama a less attractive place for businesses.
By Dr. G.P. Manish and Dr. Malavika Nair
- Economic freedom allows citizens to use their time, talents and property to their benefit through voluntary exchange, with knowledge that their property is protected from theft or government confiscation.
- Under economic freedom, prices and profit and loss in the market emerge, providing signals to allow entrepreneurs to direct resources to uses valued by consumers, resulting in prosperity and economic growth
- The Economic Freedom of the World and Economic Freedom of North American indexes measure the extent to which nations and the U.S. states respectively approach the ideal of free markets. The indexes help convincingly establish the link between economic freedom and prosperity, as well as health, income equality, and overall well-being.
- Alabama’s low state and local tax burden and labor market policies contribute favorably to the state’s economic freedom scores. But a high level of Federal spending and poor scores on other areas of business regulation lower Alabama’s economic freedom.
By Dr. George Crowley
- Public choice theory demonstrates that the incentives facing elected representatives, voters, and bureaucrats in representative democracy lead to excessive spending. Constitutional limits on government are needed to prevent excessive spending.
- Alabama is home to the world’s longest written and most amended constitution. Alabamians should consider a complete overhaul of the document to retain only features essential to limiting government.
- Fiscal decentralization enhances the tailoring of local government services to local conditions. Alabama should move to constitutional home rule for local communities, and avoid requiring state-wide decisions on purely local policy matters.
- Alabama should adopt a tax and expenditure limitation on state spending. Spending growth should be strictly limited, perhaps to the rate of inflation plus population growth.
- A gubernatorial line item veto has been proven effective in limiting excessive spending. Alabama’s line item veto should be strengthened by requiring a two-thirds majority in the state legislature for an override.
By Dr. Jim F. Couch, Dr. J. Douglas Barrett, David Black, and Dr. Keith D. Malone
- Alabama collected over $8.3 billion in revenue from 47 different taxes in 2012. The individual income tax and sales tax were the largest sources of revenue.
- The state’s tax system includes several safeguards against the tendency of politicians to tax excessively, with limits on income and property tax rates included in the state constitution. Alabama also earmarks a larger portion of its tax revenue for specific purposes like education than any other state.
- Reliance on the income tax results in considerable variance in tax collections over the business cycle. Consequently the state suffers repeated instances of painful spending cuts after state lawmakers engage in unsustainable spending when the economy booms.
- Alabama’s current tax system places a relatively heavy burden on the state’s poorest residents. Reliance on the sales tax and the form of the income tax account for the burden placed on low income families.
- Alabama has numerous options for tax reform. One promising reform alternative involves replacing the sales tax with an increase in the property tax. This reform plan yields gains in terms of both economic growth and reducing the tax system’s impact on the poor.
By Dr. John Merrifield and Jesse A. Ortiz Jr.
- School Choice works! Research shows that increasing the number and types of K-12 schools, and empowering parents to decide which is best for their children will lead to better academic outcomes for Alabama’s children—something they certainly deserve.
- A one-size-fits-all approach fails to provide the necessary flexibility to encourage experimentation and to meet the diverse educational goals of parents and students.
- Alabama’s school system is failing. Our children’s tests scores are below the national average, we have high dropout rates, and graduates are underprepared for college and lack fundamental skills for 21st century jobs.
- Evidence from school choice programs across the nation shows that even small doses of school choice boost school system performance.
The ‘School Choice’ Approach Improves K-12 Education by:
- Recognizing and Serving Diversity: Children are not all the same—they have unique talents and abilities, and different learning styles.
- Expanding Options: Alabama needs a relentlessly improving menu of school options—public and private—as diverse as Alabama’s schoolchildren.
- Empowering Parents: Parents are denied control of some of the most basic aspects of their children’s education. Parental choice provides the flexibility to encourage experimentation in education and in teaching methods, and allows individuality rather than conformity.
- Creating Competition: Competition inspires excellence. When parents have options, schools are forced to constantly strive to please current families and attract new families.
- Shifting Accountability to Parents: Giving families choice in their children’s education shifts accountability away from public officials to those that care the most—parents! Within this structure, schools and teachers must work hard to please their clients, which are the families, or these families will choose to go elsewhere.
- Engaging Parents: The current system relegates parents to the roles of passive recipients. Intellectual growth occurs only with the active co-operation of the clients: the students and their parents.
- Motivating Teachers: Specialized schools ensure that motivated teachers have the flexibility to take innovative approaches to teaching, and rewards excellence and positive results with salary increases.
Policy Options to Support School Choice:
There are policies that Alabama could adopt to promote school choice and educational accountability:
- Legalize Charter Schools: Alabama needs a strong charter law to foster the specialized schooling options that will greatly expand engagement in learning by Alabama K-12 students. Forty-three states, including the District of Columbia have laws that allow the creation of chartered public schools, but Alabama does not.
- Open enrollment: Students shouldn’t be restricted from attending high performing schools or schools that better fit their talents and learning styles just because of geographic lines. These barriers must be broken down in favor of ‘open enrollment.’
- Education savings accounts (ESA): ESA’s allow families to opt out of assigned, failed public schools and gives parents the authority and flexibility to determine how their child’s education dollars are spent on either public or private education. The state creates an annual educational deposit that parents can access for any approved educational spending.
- Course choice: This option is similar to an ESA, but with less flexibility since the state only pays for courses from public school providers.
- A universal tuition tax credit: A universal tax credit can foster the specialized schooling options that would raise the effectiveness of our educators, and engage significantly more children in academics. Families would receive a refundable tuition tax credit of $5,000 per child, eligible taxpayers will get a check (state money) for the difference between the $5,000 per child, and the amount of state income tax they would otherwise owe.
- Tuition Vouchers: State-granted vouchers would be given to parents to redeem for their children’s education at either private or public schools.
Cycle of Failure:
We’re recycling policies with a track record of costly disappointment:
- Higher standards, teacher micro-management, across-the-board class-size reductions, more stringent teacher qualification requirements, promises to improve political-administrative accountability based on test scores, and large per-pupil spending hikes—all have failed.
- Throwing more money at a failing system doesn’t make sense. We need fundamental change in our approach to education:Alabama is not getting nearly enough for its massive investment in K-12 schooling.
- Repercussions: Symptoms of failing schools include low student achievement levels, and a work-force that is ill prepared for 21st century jobs at an exorbitant cost to taxpayers.
- Alabama spending per child ranks at the bottom of U.S. states (#40) spending $8,562 per year.
The Dan Morris Show (WACV-FM), Montgomery, AL (9/3/14)
by Dr. Daniel J. Smith and Robin P.K. Aguiar-Hicks
- Turning non-educational services like transportation, operations and maintenance, and food services over to private companies can save states millions of dollars. The money saved can be funneled back into the classroom for educational purposes.
- Privatizing non-educational services also improves education by letting schools do what they do best: teach our children.
- School officials and administrators could spend more time on the educational needs of students and less time managing non-education programs and employees.
- Alabama is behind other states in adopting this innovative approach, meaning its children will fall behind as well.
- Less than 16 percent of school districts have adopted this approach.
Many Alabama Public School Districts have resorted to budget cuts that adversely impact educational quality. Schools and teachers should not have to compromise when it comes to the time they devote to teaching.
- Private companies have been proven to deliver higher quality services at a lower cost than school districts, which have specialized skills and training to run educational institutions but not cafeterias.
- Just as individuals hire professional plumbers and companies contract with landscaping companies to mow their lawns, school districts can save money and get better service by contracting with professional companies to provide non-educational services. This helps ensure that taxpayer dollars earmarked for education are actually spent in the classroom.
- Alabama school districts currently spend almost $1.4 billion—nearly $2,000 per pupil—on food, operations and maintenance, and transportation services. This represents nearly 20 percent of Alabama’s education budget.
- Instead of compromising classroom quality, school board members and administrators should turn to private companies for non-academic functions.
- Nationally, one in six education dollars goes towards funding these services so even modest savings can result in millions of more dollars in the classroom.
- A study on transportation contracting in Indiana by Robert McGuire and Norman Van
Cott found that contracting school districts saved an average of 12 percent.
- In Alabama, 12 percent savings on transportation would translate into more than $40 million in annual savings.
- School districts around the country are hiring private companies for food management,
maintenance and operations, and transportation services. Michigan is leading the way
with more 65 percent of school districts contracting out for at least one of these
three major services. And, the results have been staggering:
- Cheboygan Area Schools is saving $34,000 a year contracting out food service management;
- Gaylord Community Schools saved $100,000 the first year contracting out custodial services and expected to save $1 million over the following three years; and
- Hastings School District is saving more than $100,000 per year contracting out custodial services.
Alabama Public Radio, Tuscaloosa, AL (9/5/14)
The Dan Morris Show (WACV-FM), Montgomery, AL (9/3/14)
By Dr. Scott A. Beaulier
- Alabama Medicaid, the state health care program primarily for poor Alabamians and their children, now accounts for over 40% of General fund expenditures. Both the number of enrollees and total spending have increase dramatically since 2000.
- Projected spending growth, even if Alabama never embraces the expansion encouraged by the Patient Protection and Affordable Care Act, will further strain the state budget. And changes in the Federal funding formula could wreak havoc with the state budget at any time.
- Alabama needs sensible and sustainable reforms, already tested in other states, to bring Medicaid spending under control and improve the quality of care for beneficiaries.
- The most promising reforms include changing Federal funding for Alabama Medicaid to a block grant system and greater reliance on alternatives to traditional nursing homes when patient circumstances permit.
By Eileen Norcross, M.A.
Alabama’s three major pension plans: the Employee Retirement System (ERS), the Teachers Retirement System (TRS) and the Judicial Retirement Fund (JRF) face a funding gap of $59 billion —four times larger than the state’s estimate.
If steps aren’t taken to address this shortage, the money working Alabamians have been promised, and expect to receive, might not be there when they retire.
The good news is that there are steps Alabama can take now to close this funding gap and avoid crises like we’ve seen in cities like Detroit, MI and Central Falls, RI.
Alabamians young and old will suffer the consequences of the funding shortage:
- Many city and state governments across the country have been forced to make cuts to essential services that all citizens rely on—including education, public safety, and infrastructure—to address similar funding shortages.
- It is also likely that taxes will have to increase, saddling the next generation with payments for unrealistic pension obligations.
- Retirees simply won’t get the money they were promised
How did this happen?
Faulty accounting and government mismanagement of funds created this crisis:
- Pension administrators have been, and continue to, significantly overestimate investment returns on employee pension contributions.
- Pension administrators are using the amount they assume they’ll earn on investments with employee contributions—a figure which is unrealistic over the long-term—to determine the how much they owe to the state’s future retirees.
- Alabama’s government has made poor investment decisions with pension contributions.
Solution: Alabama must...
- Adopt sound and accurate accounting methods.
- Stop investing pension contributions in economic development projects—like golf courses—or to attract firms to locate to Alabama. Investment policy should solely focus on securing a safe, prosperous retirement for workers.
- Replace its defined benefit plan with a defined contribution plan. This removes the government as manager of employee retirement savings and puts employees in control.
- When valuing Alabama’s pension payment obligations based on a “guaranteed” rate of investment returns, it is estimated that the program will run out of assets by 2023.
- Closing the pension funding gap would require employee contributions to increase from $1.6 billion to $3.4 billion annually, or $819 per household. This is money that could be spent on schools, improving our roads, or public safety.
- The RSA’s three main plans hold $28 billion in assets to cover $42 billion in guarantees to current and future retirees, for a funding gap of $14 billion.
- According to the state’s estimates, 65 percent of plan liabilities are covered by plan assets, leaving 35 percent of the plan unfunded. However, these measures miscalculate plan liabilities by linking their value to the expected performance of plan assets—this is akin to underpaying on your mortgage because you expect your investments to do well next year.
By Dr. George R. Crowley
- Alabama has a long history of aggressive use of tax incentive packages for industrial recruitment. The state’s various tax incentive deals with manufacturing firms have likely reached into the billions of taxpayer dollars.
- Alabama is not alone in this campaign, as many states are similarly aggressive in offering tax deals to large, high-profile corporations. Despite the popularity of using tax incentives for industrial recruitment, there is little scholarly evidence of their effectiveness, and the potential exists for the incentives to crowd out investment by firms lacking the political clout to receive a deal.
- This chapter analyzes five recent, high-profile tax deals between the state of Alabama and Mercedes-Benz, Honda, Hyundai, National Alabama Corporation, and ThyssenKrupp. Evidence suggests most of these deals have a strong impact on the manufacturing sector where they are located, but surrounding areas do not appear to benefit. Tax revenue data show a modest increase in the growth rate of property tax revenues in these counties relative to the state as a whole.
- Although the majority of manufacturing plants created through tax incentives have created thousands of jobs for Alabamians, the jobs have come at a significant cost, both in taxpayer dollars and potentially lost opportunities.
- Alabama should establish itself as competitive without the use of selective incentives by maintaining its low tax rates and simplifying its tax code, and get policymakers out of the business of picking winners to receive tax benefits. At a minimum, the development process should be revamped to improve oversight, transparency, and accountability.
by Dr. Daniel J. Smith
- Occupational licensing prevents people from working and earning a living, and disproportionately harms low-income and minority Alabamians.
- Under the guise of protecting the public, professional groups use occupational licensing requirements as a means to block competition to keep prices high.
- Studies have found that many occupational licensing requirements fail to increase quality for consumers or improve safety.
- Alabama policymakers should examine licensing’s significant costs, which include hindering economic growth, reducing labor mobility for professionals, higher prices for goods and services, and decreased access to goods and services for low-income consumers.
- Policy-makers can better protect consumers, support economic growth and increase individual freedom in Alabama by scaling back licensing requirements for certain professions that pose little risk to consumers and transitioning from occupation licensing to occupational certification.
Alabama Public Radio, Tuscaloosa, AL (4/28/2014)
Morning Show (WCKF-FM), Ashland, AL (4/28/2014)
NBC in Montgomery (WSFA-TV), Montgomery, AL (4/23/2014)
Straight Talk (WGOL-AM), Russellville, Al (4/21/2014)
By Dr. John A. Dove
- Alabama's legal system is undermining long-term economic growth in the state.
- "Legal Reform in Alabama: Recommendations and Implications," recommends specific reforms including selecting judges based on merit rather than political connections and adopting measures that curb opportunistic lawsuits, which deter business growth.
- These reforms will:
- Increase job growth, worker productivity, wages, and business research & development (R&D), which leads to innovation.
- Increase predictability, impartiality, and independence within the judicial branch of government, helping to ensure that the rule of law functions well for everyone - not just those with political connections.
- Businesses need a stable, predictable and fair legal system in order to survive and
- Knowing what the laws are and that that apply to everyone equally - now and in the future - allows businesses to responsibly invest and grow.
- When laws constantly change or are applied inconsistently, business are unable to accurately plan and, subsequently, they hold-off on investment and expansion.
- This hurts all of us - when businesses don't grow here in the state, or choose not to come because of unpredictability or discrimination, we miss out on jobs and economic activity.
By Dr. Adam B. Lowther
- The primary characteristics of the great American narrative—individual liberty, personal responsibility, respect for private property, and the desire to “avoid entangling alliances”—have long served as the glue that binds the nation together.
- A new ethic of entitlement, dependence, collective responsibility, and a desire to export democracy through a variety of means—to include force—is replacing that narrative.
- The turn from the great American narrative toward the victim narrative has had negative consequences for economic policy, both in Alabama and the nation. The rise of the victim narrative affects all aspects of government activity, including military and foreign affairs.
- Meeting the long-term challenges in economic and foreign affairs facing Alabama and the United States will require a rejection of the worldview that has led to the current condition.
By Dr. Art Carden
- Economic institutions and a culture that dignifies honor and innovation provide the foundation for growth, prosperity and improving lives in Alabama. With the proper institutions in place – secure property rights, a dependable legal system, political stability, honest government, and open & competitive markets – growth ensues as people search for new and better ways to do things.
- Alabama’s policy makers have erected barriers to this natural progress through occupational licensing, immigration restrictions, and blocking innovative businesses. At the same time, policy makers waste resources in pursuit of government-led economic development plans like sports stadiums, theme parks, and the Alabama Cruise Terminal.
- A culture and civil society which dignifies commerce and innovation provides a foundation for the institutions to support prosperity and growth. Alabama’s civil society – churches, clubs, and charitable organizations – can contribute to a culture conducive to growth and flourishing.
Each study draws on the latest and best research on state policy issues to identify trends and determine what policies lead to a strong economy and greater well-being.
The studies, therefore, use research available about Alabama including policies that impact its economy, its economic freedom ranking, its unemployment numbers, and the state of its schools, among other measurements of economic health and societal well-being, to recommend policy reforms that will enhance freedom and prosperity in Alabama.